Why Permissioned Blockchain Technology Is Important to Enterprises

The hype around blockchain technology as it relates to cryptocurrencies such as bitcoin is reaching an all-time high, but enterprise organizations are taking a longer-term, more measured approach.

It is first important to define what we mean when we talk about blockchain technology because that determines the scope of the discussion. Many people have very strong and deeply held opinions about what should and should not be called blockchain. I tend to use it as an all-encompassing term. This includes what are also known as distributed ledger technologies. However, the blockchain technology I am most interested in is permissioned blockchains and not the public (and often anonymous) blockchain technologies. 

Examples of permissioned blockchain technologies include Hyperledger, R3 Corda, and Ethereum. In a permissioned blockchain network, you need a member or administrator to grant you permission to join. Whoever sets up the network determines what the criteria are to join and which existing entities in the network have the authority to give new entities permission to join.

Why is permission so important for an enterprise blockchain? There are two reasons:

  1. Throughput—If I know who the people are, then I can revoke access to any bad actors and reduce the requirement for complex and electricity-hungry protocols such as proof-of-work. Proof-of-work is responsible for bitcoin network’s huge energy consumption. This enables much faster transactions and higher throughput at a fraction of the cost.
  2. Trust—If I am going to do a transaction with somebody, I need to know who they are to make sure I am legally allowed to transact with them. Plus, if something goes wrong, I always want to be able to seek recourse through the legal system. It may seem strange to talk about trust when blockchain is a technology that is designed to provide trust between untrusting entities. But trust is not absolute. For example, I trust you are who you say you are, but I may not trust you to pay on time. Additionally, I may not trust you to correctly record the orders I place with you and properly calculate the amount I owe you. I could also not trust all your suppliers to deliver the parts or services to you in order for you to provide me with goods or services. It is possible I do not trust the shipping company, or if it is cross-border trade, I might not trust authorities in a different jurisdiction from the one I operate in to process things in a transparent and timely manner.

One of the quickest wins for blockchain will be to provide trust that parties involved in transactions are correctly recording the details of the transaction. This is why we talk about a shared ledger. Meaning, I know you see the exact same data that I see, and that nobody can alter or change the record after the fact. Today, enterprises keep separate records in totally different systems. For example, my supply chain system has details of my orders placed and to be able to obtain that information, or get changes in that order, I need to send a message to you (via phone, email, or electronically). From there, I have to trust that you record it correctly before my order is processed and that goods are shipped as expected, as I have no visibility into how you record the data.

Business transactions are always complex—from creation to delivery to payment—but imagine if this whole process could be automated. If we use a blockchain to implement these flows, the fundamental difference is that we will be looking at a shared set of data that both parties have endorsed. This is the source of truth—we use a smart contract to implement the business logic that governs updates to the shared data. As a result, we have a self-reconciling ledger of what we owe each other. And, going beyond how much money we owe each other, it also records what goods or services we owe each other and what has been delivered and accepted or returned.

Another common way we can improve trust is by introducing a trusted third party. The party will maintain a centralized database for all parties to update regularly and get data out of as needed. This concept is similar to credit reference databases, or clearing houses and registrars for financial transactions. You’re trusting one, central system with all the data with an associated cost and risk of a single point of failure. This is where blockchain has the potential for disruption and why financial services companies are investing heavily.

The technology is still in its infancy. Both R3 Corda and Hyperledger only released their 1.0 versions last year. This means there is a ways to go in terms of core technology platforms, but also in developer tools. The year 2018 will see more pilots moving into production, meaning we must solve the issues of how blockchain systems integrate and cooperate with our existing enterprise data management systems. By the end of the year, we should have more clarity on when we will see broad adoption of blockchain technology in the enterprise.