Uncharted territory

Understanding blockchain and its benefits remains murky for many

Posted on Jul 29, 2019 :: Standing Feature
Jessica Thiel
Posted by , Insight on Technology Staff Writer

To see just how foreign a concept blockchain is to many companies, one need only look to the results of the Northeast Wisconsin Manufacturing Alliance’s Industry 4.0 survey. A whopping 70 percent of respondents put the tool on their list of technologies that are the most confusing or have the least obvious return on investment.

Other technologies that landed on that confusing/low ROI list included digital twin, drones and facial recognition. Companies’ seeming consternation over these tools doesn’t mitigate their importance, however, says Jamie Lynch, director of St. Norbert College’s Strategic Research Institute, which conducted the Microsoft-funded study.

“A number of our area companies report that they’re not sure how (and when) those very important Industry 4.0 technologies will have an impact on them,” Lynch said at NEWMA’s June full membership meeting, where the organization unveiled the results.

Companies’ bewilderment doesn’t surprise Ben Huegel, an assistant professor of business administration and accounting at St. Norbert. While he’s studied blockchain extensively, he says some aspects of it still manage to leave him confused and going back to information sources to gain greater understanding.

Huegel says even defining blockchain can prove tricky. Some erroneously see blockchain and bitcoin or cryptocurrency as synonymous. While they’re connected, in that bitcoin operates on a blockchain system, they’re not the same thing, he says.

“I think right away what people generally look at it is they hear blockchain and they think bitcoin and they go, ‘Well, cryptocurrency, that’s not important to me right now. I don’t have to worry about it.’ But there’s a ton of practical application, and that’s what’s happening now,” he says.

So, that’s what blockchain isn’t, but what is it? Huegel says three characteristics define blockchain: It’s a distributed ledger technology versus a centralized database, it’s consensus driven and it’s immutable.

In today’s world, most companies operate on a centralized database that stores all their information. In a blockchain system, all that information goes onto several computers, referred to as nodes, Huegel says. In blockchain, there’s no single gatekeeper. Rather it’s a distributed system, so everyone on the blockchain has access to the same information that’s stored on their systems.

For most transactions between two companies today, each updates information on its own side. Company A buys $500 of merchandise from Company B, with Company A entering minus $500 on its side and Company B entering plus $500 on its own. The systems operate independently from each other.

If both companies were to get on one blockchain, the companies would enter the outflow and inflow of money, indicating a transfer. If, however, one side were to enter a typo, say $550 instead of $500, the numbers wouldnt match, and the transaction wouldn’t reach consensus.

On a blockchain, Huegel says, a consensus — 51 percent or 50 percent plus one of all nodes on the network — must go through and approve a transaction for it to be recorded on the ledger. Using a centralized database, someone would need to uncover a mistake. In blockchain, mistakes surface through lack of consensus.

That leads to the third principle of immutability. Once something is recorded, it can’t be changed. If someone tries to change something, it’s recognized and permanent, as blockchain records every modification. This differs from individual computers, where once data is gone, it’s gone, Huegel says.

Blockchain, Huegel says, offers companies some key benefits including trackability, security, faster processing times and reduced transaction costs. “That’s probably the most tangible and, from a practical perspective, probably the biggest reason private businesses would start to look at implementation of blockchain,” he says of the lower transaction costs.

Still, blockchain carries drawbacks and unknowns, Huegel says. From a security standpoint, changes are visible to the entire network, but issues could arise around unauthorized access. In addition, he says, it’s an emerging technology that faces regulatory uncertainty and lacks large-scale implementation.

Powerful applications

Sandra Bradley, CEO of Madison-based Hyper Innovation, says her innovation-as-a-service company is working with its clients, which include Fortune 500 companies, to experiment with blockchain in a “sandbox” environment. The technology offers verifiability and transparency that could prove advantageous for companies, but it’s not for everyone, she says.

The technology works well for about “15 percent of applications; the other 85 percent may as well use a relational database,” says Bradley, who describes herself as neither blockchain evangelist nor detractor.

Blockchain makes way for smart contracts, which can create more efficient processes, whether in filling out mortgage paperwork or streamlining vendor relationships in a manufacturing setting, where it can speed supply chain interactions. While blockchain offers interesting applications on its own, Bradley says it could become powerful when paired with other technologies such as internet of things or artificial intelligence.

Girish Ramachandra, senior manager in the technology consulting practice for Wipfli, says blockchain is gaining traction in industries including the nonprofit and government sectors, manufacturing, construction, real estate, FinTech and agriculture.

In ag, for example, blockchain’s traceability facilitates tracking of the food supply. The IBM Food Trust uses the technology to “improve transparency, standardization and efficiency throughout the food supply chain,” according to its website.

In the event of food recalls or outbreaks, organizations can more quickly track the issue back to its source. Walmart did a proof of concept in China and reduced the time to track mangoes to their source from seven days to 2.2 seconds, Ramachandra says. “That’s a huge, huge operational efficiency improvement.”

Walmart serves as one powerful example of the need for companies to begin to understand this technology. It’s building a blockchain framework, and farmers may need to integrate with it to do business with the company, Ramachandra says.

Bradley echoes this sentiment. If companies fail to adapt to a world that increasingly runs on smart, automated transactions, they could get left behind. Leaders need to begin to educate themselves and prepare now.

“How do we operate in a world where there are going to be smart, automated transactions? How can we prepare today for a future that’s going to be different and be sure that we are part of that?” she says.

Where to start

While widespread adoption of blockchain could be five to 10 years on the horizon, experts say it’s important for companies and leaders to begin educating themselves and planning now. Good
first steps include:

• Sharing information and learning through industry peer groups

• Using a sandbox model, which includes spending time on experimenting and experiential learning

• Researching industry-specific information

• Exploring public blockchains

• Seeking the help of a public accounting firm