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Trust is foundational to business, yet maintaining it—particularly throughout a global economy—is expensive, time-consuming, and, in many cases, ineffective. Could blockchain be part of the answer?

Blockchain is more than the technology underpinning the cryptocurrency bitcoin. Organizations throughout the public and private sectors have begun exploring how this technology might profoundly transform some of their most basic operations, from contract execution to transactions with customers and suppliers.

Blockchain is a distributed ledger that enables communities to record and share information. Members maintain their own copies of the information and must validate any updates collectively via a shared consensus mechanism. 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 in their entirety.

A protocol manages the way new edits or entries are initiated, validated, recorded, and distributed. With blockchain, cryptology replaces third-party intermediaries as the keepers of trust, with all participants running algorithms to certify the integrity of the whole. This creates a trustworthy, transparent, immutable repository of truth that is highly resistant to outages, manipulation, and censorship.

Rewiring Markets

Blockchain’s ability to replace intermediaries is precisely why this technology matters. It can reduce overhead costs when parties trade assets directly with each other. Its ability to guarantee authenticity across institutional boundaries will likely help parties think about the authenticity of records, content, and transactions in new ways. Consider, for example, the efficiencies that shared ledger technology might bring to the labyrinthine global payments market, or how a trusted, transparent, stable environment might help developing countries reduce the estimated $1.26 trillion they lose each year to corruption, bribery, theft, and tax evasion.¹

The financial services industry (FSI) is today’s institutional authority of record for payments and remittances. It plays an important role in the issuing, trading, and ownership of financial instruments, and in the stability of the global financial system. It comes as no surprise, then, that FSI organizations are aggressively pursuing blockchain investment and experimentation. Outside of the financial sector, organizations across industries are also ramping up blockchain programs and exploring opportunities such as next-generation payments, loyalty and rewards platforms, smart contracts, asset management, and exchange scenarios.

Patterns of Value

New blockchain use cases are emerging weekly, but this technology is not applicable to all business and operational problems. It’s worth examining both the underlying benefits of blockchain² as well as the associated challenges:

Transparency. Ease of sharing and visibility are essential features of blockchain; lack of one or the other is often a central driver of blockchain adoption. These features become particularly critical in transactions that involve more than one organization making blockchain entries.

Trust. The immutability of blockchain makes it nearly impossible for changes to be made once it has been established, which increases confidence in data integrity and reduces opportunities for fraud.

Disintermediation. With blockchain, peer-to-peer consensus algorithms transparently record and verify transactions, eliminating the need for a third party and potentially reducing costs, delays, and general complexity.

Collaboration. Blockchain can be programmed to instigate specific transactions when other transactions are completed. This could help parties collaborate, without increasing risk, on transactions with multiple dependencies or those authored by different parties.

Security. With private and public key cryptography part of blockchain’s protocol, transactional integrity becomes virtually unassailable. Trust zones can also be established, including open public ledgers and permission-based shared or private blockchains.

Where Do You Start?

Early adopters, largely within FSI, are piloting blockchain in innovation labs, filing patents, and investing in technology startups. Organizations across industries can aggressively explore scenarios in which this technology could reinvent parts of their operations, value chains, or business models. Specific areas of focus may include:

Education. Blockchain can be confusing, and some of the earliest and most public use cases involving bitcoin may be deemed irrelevant or underwhelming. Concerted education efforts may be required, ideally coupled with a disciplined approach to innovation and a prototype demonstrating potential use cases specific to a given organization and industry.

Embrace the ecosystem. The blockchain community is seeing considerable investment from established industry institutions, technology vendors, academia, venture capital firms, and startups, among others. Now is not the time to worry about which technologies or standards will dominate. That said, any solutions can include abstractions around protocols and platform features to allow portability should it eventually become necessary to switch to a different standard.

Consider partners. With the blockchain ecosystem growing, it may make sense to partner with one or more vendors. But before signing on the dotted line, try to understand what makes a prospective partner’s offering unique. For instance, is the partner willing to co-invest in solutions (or even proofs of concept) that will meet the organization’s specific needs? Given the nature of blockchain, partnerships with business partners, peers, and competitors can be considered.

Know your trust zones. Public, private (i.e., permission-based), or hybrid? Established players often create tightly managed, permission-based zones that basically impose legacy thinking about what constitutes “trust” on a new architecture. Each case will likely be unique and thus require its own trust zone variation. With blockchain, the most effective option may not always be permission-based.

Understand blockchain’s limitations. Blockchain’s consensus algorithms³ require more computing power and introduce delays. The very features that protect blockchain against theft and fraud could also lower performance and limit scale if not correctly implemented. As a result, high-volume transactions with latency sensitivity may not be ideal candidates for this technology right now. In addition, blockchain was not originally designed to ensure the privacy of participants or the confidentiality of their transactions. Architects and information security teams need to design blockchain solutions accordingly.

Regulation and compliance. With blockchain technology, progress is outpacing regulation, which may help organizations gain momentum with their initiatives in the short term. Eventually, regulation—and legal precedents that recognize blockchain transactions—will almost certainly catch up with this technology. Additionally, the adoption of smart contracts will require a legal framework, which is still in development. Private blockchains will be managed under private agreements.

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Business, government, and society are built on trust, and any promise to use modern computing principles to transform how we achieve and apply trust is disruptive—perhaps on a historic scale. Will the eventual embrace of blockchain mean that venerable institutions of trust disappear? That seems unlikely, but it does mean that, very soon, they may have to transform themselves if they hope to continue participating in blockchain’s brave new world.

—by Eric Piscini, principal; Joe Guastella, principal; and Tom Nassim, senior manager, Deloitte Consulting LLP; and Alex Rozman, senior manager, Deloitte Advisory