Enterprise blockchains are typically permissioned systems in which only known partners are part of the network. This is different from public blockchains (like Bitcoin or Ethereum) in which nodes are anonymous and all information is publicly available. This approach is generally required by corporations because they do not want to share their confidential information with unknown third parties.
Permissioned blockchain systems enable trusted peer-to-peer transactions and distribute transaction data across a network so that all authorized players see the same information. While centralized systems are optimized for single players, decentralized blockchain systems are optimized for working across an ecosystem. Decentralized systems, by their very nature, require a community of many players in order to be useful and maximize their capabilities.
Key benefits include:
- No need for trusted intermediaries
- More cost effective
- No need for costly record matching or reconciliation
- Reduction in hacking risk
These benefits result in an important paradigm shift when industry groups decide to adopt blockchain technology. The key industry players often band together in a consortium, not just to develop a standard, but actually to work together and share information. What is fascinating is that competitors in the consortium agree to open their centralized software infrastructures to one another in an unprecedented manner. Today there are over 100 blockchain consortia, including:
- Enterprise Ethereum Alliance (EEA): 500 members including Cisco, Accenture, Bancor, Consensys, Intel, HP Enterprise, J.P. Morgan, NTT Data, Microsoft, Pfizer, Samsung
- We.Trade (Trade Finance): 9 key banks including HSBC, Deutsche Bank, UniCredit, Rabobank, KBC, Natixis, Nordea, Santander and Société Générale
- R3 Fintech Consortium: 200 members including Barclays, Bank of America, Citibank, Morgan Stanley, Goldman Sachs, J.P. Morgan, Credit Suisse, and UBS
- Blockchain in Transport Alliance (BiTA): 300+ members including UPS, FedEx, JD.com/JD Logistics, SAP, Google, Daimler, Salesforce, GE Transportation, P&G, HP, Hitachi, Microsoft
- Hyperledger: 200+ members including IBM, SAP, J.P. Morgan, TradeShift, NEC, Cisco, Accenture, American Express, Baidu, Deutsche Bank, Daimler, Aetna, Lenovo, Oracle
The enterprise ecosystem has deployed thousands of blockchain technology pilots over the last few years. Many real-world live deployments are projected for 2019, and there are three key sectors that are gaining traction including:
Supply Chain Management
- Product traceability (Track & Trace)
- Product provenance & authenticity
- Fighting Counterfeit Drugs
- Electronic Health Records (EHR) Interoperability
- Cross Border Payments
- Supply Chain Financing
For each sector, we examine the industry, its key challenges, and then how blockchain and distributed ledger technologies (DLT) can provide innovative and powerful solutions. First though, we discuss centralized processes in the enterprise ecosystem as a counterpoint to the new decentralized systems.
Centralization in the Enterprise
Most enterprise-grade software infrastructures are centralized systems that provide services within a single company, primarily to its employees. These systems may also provide restricted access between a company and its direct partners or vendors. For example, most large companies have an enterprise resource planning (ERP) system which integrates all their major business functions such as procurement, sales, HR, accounting, governance, etc. to enable more efficient operations. Though internally integrated, ERP systems are very challenging and expensive to integrate with other systems.
There are many other centralized enterprise software platforms like customer relationship management (CRM), e-commerce systems, content management systems (CMS), business intelligence (BI), marketing automation software, etc. that help companies automate and streamline many important business functions. In healthcare, providers also make use of centralized electronic health records (EHR) systems to track patient information. All these various systems are typically hosted under centralized public, hybrid or private cloud architectures. Integration of different enterprise software systems within a company or across companies can be complex and costly, so many systems become silos of data and functionality.
Data sharing across an ecosystem, be it in healthcare, supply chain, or finance is very important for improved productivity, so each sector has developed centralized solutions to span their ecosystems. When spanning an ecosystem, data sharing invariably links competitive groups. This reality plus the need to maintain trust, protect against hacking, and improve interoperability has led to two main types of solutions. Government-mediated centralized solutions are more common in regulated industries such as banking, financial services, and healthcare. Single company mediated centralized solutions are more common in more unregulated industries like supply chain and logistics.
Here’s a quick overview of some examples of centralized ecosystem-level infrastructures that are currently in place:
- Supply Chain/Logistics: The two largest names in retail in the US are Walmart for brick and mortar ($500B in revenue) and Amazon for online ($178B in revenue, 40%+ of online orders). Both giants have the most efficient and technologically sophisticated supply chains that are actively studied by the entire industry. To provide process transparency and control and drive down costs and shipment time, both leaders have centralized and own the majority of their logistics and warehouse infrastructure. For example, Amazon has invested billions of dollars to build hundreds of fulfillment and sorting centers (warehouses), has deployed tens of thousands of robots, and has built out a fleet of planes and delivery trucks. Both Amazon and Walmart have developed their own centralized custom supply chain software and mobile apps and employ hundreds of thousands of employees to operate their supply chain and logistics infrastructure.
- Healthcare: In many countries, patient health records are being or have been converted to electronic form and stored in electronic health record (EHR) systems. Despite interoperability standards to promote more data sharing, few if any of these systems can successfully communicate with each other. As a result, government-backed health information exchanges (HIEs) have been funded and set up to create a centralized repository of patient records at the community, state, regional, and/or country level. Some HIEs are federated, meaning that they maintain the data in a decentralized fashion, others hybrid, however, today most are centralized. Building a country-spanning, centralized HIE infrastructure is a slow process and for the US a goal of 2024 has been set by the government for the development of a basic interoperable health IT infrastructure. Global systems are also migrating to decentralized models, and hybrid models (centralized and decentralized combined models) are expected to grow the fastest through 2024.
- Financial Services/Banking: The banking sector in each country is generally overseen by a central bank which is often controlled by the State government. The central bank sets monetary policy, regulates the banking system, acts as a central clearing house for transactions, and holds national and international currency reserves. In the financial services sector securities transactions are typically mediated by centralized clearing houses. Clearing houses act as an intermediary to securities transactions to clear and settle the transaction, regulate delivery of the instruments bought or sold, report trading information, and reduce counterparty risk (options/derivatives). In the US most securities transactions go through a process of settlement and reconciliation mediated by the clearing houses which generally takes 2 days (T+2).
Some of the main challenges with these large centralized systems include:
- Need for trusted intermediaries
- High costs
- Multiple versions of the ‘truth’
- Need for record matching or reconciliation
- Single point of failure
For a deeper dive on these verticals, click here for part two of this article.
I co-authored this article with my colleague, Jorden Woods, of DoubleNova Group. The content draws heavily on our experience advising relevant blockchain companies or collaborating with hands-on subject matter experts.