In Blockchain We Trust
Do your customers trust you? And do you trust them? The emerging trust economy depends on each transacting party’s reputation and digital identity – and that’s where blockchain comes in. The technology behind digital contracts transforms reputation into a useful, manageable attribute.
Part 2 of a 5-part series. Read Part 1
You can also read the full article or download a copy at Deloitte University Press.
Given blockchain’s starring role in the Bitcoin hype cycle, there may be some lingering confusion about what this technology is and the value it can potentially bring to business. Simply put, blockchain is a distributed ledger that provides a way for information to be recorded and shared by a community.
In this community, each member maintains his own copy of the information, and all members must validate any updates collectively. The information could represent transactions, contracts, assets, identities, or practically anything else that can be described in digital form. Entries are permanent, transparent, and searchable, which makes it possible for community members to view transaction histories. Each update is a new “block” added to the end of the “chain.” A protocol manages how new edits or entries are initiated, validated, recorded, and distributed. Crucially, privacy can also be selectively enforced, allowing varying degrees of anonymity or protection of sensitive information beyond those who have explicitly been given access. With blockchain, cryptology replaces third-party intermediaries as the keeper of trust, with all blockchain participants running complex algorithms to certify the integrity of the whole.
As the need for portable, manageable digital identities grows, individuals and organizations can use blockchain to:
1. Store digital records
To understand blockchain in the context of the trust economy, think of it as the tech-charged equivalent of the public ledgers that would be used in towns to record everything of importance: the buying and selling of goods; the transfer of property deeds; births, marriages, and deaths; loans; election results; legal rulings; and anything else of note. Instead of a bearded master wielding a long-stemmed stylus to record miniscule but legible entries in an oversized ledger, blockchain uses advanced cryptography and distributed programming to achieve similar results: a secure, transparent, immutable repository of truth – one designed to be highly resistant to outages, manipulation, and unnecessary complexity.
In the trust economy, the individual – not a third party – will determine what digital information is recorded in a blockchain and how that information will be used. With an eye toward curating a single, versatile digital representation of themselves that can be managed and shared across organizational boundaries, users may record:
- Digitized renderings of traditional identity documents such as driver’s licenses, passports, birth certificates, social security cards, voter registration, and voting records
- Ownership documents and transactional records for property, vehicles, and other assets of any form
- Financial documents including investments, insurance policies, bank accounts, credit histories, tax filings, and income statements
- Access management codes that provide any identity-restricted location, from website single sign-on to physical buildings, smart vehicles, and ticketed locations such as event venues or airplanes
- A comprehensive view of medical history that includes medical and pharmaceutical records, physician notes, fitness regimens, and medical device usage data
As a repository of valuable data, blockchain can provide individual users with unprecedented control over their digital identities. It can potentially offer businesses an effective way to break down information silos and lower data management costs. For example, in a recent blog post, Bruce Broussard, president and CEO of health insurance provider Humana, shared his vision of a future in which hospitals, clinics, and insurance companies streamline administrative processes, increase security, and achieve significant cost savings by storing and managing electronic health records on a blockchain.1
2. Exchange digital assets without friction
Using blockchain, parties can exchange ownership of digital assets in real time and, notably, without banks, stock exchanges, or payment processors – all applications requiring trusted digital reputations. Many of blockchain’s earliest use cases for business involved facilitating cross-border payments and intracompany transfers. Applying that same basic transactional model to person-to-person (P2P) transactions, blockchain could potentially become a vehicle for certifying and clearing asset exchanges almost instantaneously. What once took three days to clear now takes three milliseconds.
Though broad acceptance of P2P asset exchanges via blockchain may still be a few years away, the exploratory steps some companies are currently taking offer insight into where blockchain deployment may be headed. For example, Microsoft and Bank of America Merrill Lynch are jointly developing a cloud-based “blockchain-as-a-service” offering that will execute and streamline asset exchanges between companies and their customers.2
3. Execute smart contracts
Smart contracts represent a next step in the progression of blockchain from a financial transaction protocol to an all-purpose utility. They are not contracts in the legal sense, but modular, repeatable scripts that extend blockchain’s utility from simply keeping a record of financial transaction entries to implementing the terms of multiparty agreements automatically. The fact that they are not legally binding makes trust even more important.
Here’s how they work: Using consensus protocols, a computer network develops a sequence of actions from a smart contract’s code. This sequence of actions is a method by which parties can agree upon contract terms that will be executed automatically, with reduced risk of error or manipulation. Before blockchain, this type of smart contract was impossible because parties to an agreement of this sort would maintain separate databases. With a shared database running a blockchain protocol, the smart contracts auto-execute, and all parties validate the outcome instantaneously – and without the involvement of a third-party intermediary.
Though smart contracts may not be appropriate for some legal agreements, they can be a worthwhile option in situations where networks of parties engage frequently or in agreements where counterparties are performing manual or duplicative tasks for each transaction. For example, they could be deployed for the automated purchase or sale of financial instruments, parametric insurance contracts, and certain automatic market-making activities, as well as for digital payments and IOUs. In each case, the blockchain acts as a shared database to provide a secure, single source of truth, and smart contracts automate approvals, calculations, and other transacting activities that are prone to lag and error.3
Stay tuned for parts 3 to 5 of this series. You can also read the full article or download a copy now at Deloitte University Press.
1 Bruce Broussard, “Blockchain: Transformational technology for health care,” LinkedIn blog post, August 8, 2016. View in article
2 Microsoft, “Microsoft and Bank of America Merrill Lynch collaborate to transform trade finance transacting with Azure Blockchain-as-a-Service,” September 27, 2016. View in article
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