Why are Blockchains Useful for Business?


Tas Dienes, EEA Mainnet Interest Group

fresh article by Josh Stark sets up a new framework for understanding the utility of blockchains. He summed it up in a tweet thread here, but it’s worth reading the whole article to fully understand the idea. I’ll try to condense it into one paragraph, but please read the original.

Blockchains have a property called “hardness,” which means they have the power to make some fact, such as the state of a database, very likely to be true in the future. The system is immune to change outside of predefined rules. The degree of hardness is proportional to the level of decentralization – the more independent operators a blockchain has, and the more economic interest each operator has in the proper functioning of a blockchain, the “harder” the blockchain is.

Historically, people have built hardness into systems using matter and institutions. Institutions such as governments, legal systems, central banks and corporations create some expectations of predictability or certainty about the future on which to base their decisions and plans. They’re not perfectly reliable, but over time they’ve proven to be a useful way to avoid chaos and give people some comfort that certain rules will be followed – the police can arrest you if you break the law, or a court can enforce an agreement. between two parties. The physical properties of matter have also been used to provide such predictability or hardness. For example, the supply of gold is difficult – it increases at a fairly slow rate that has an upper limit, and you can be pretty sure there won’t be 10x more gold in circulation next week. Safes in which you can store your gold are also difficult – they give you the assurance that your gold will stay in the same place where you left it. A fortress (where you can keep your safe) derives hardness from both matter (strong, high walls) and institutions (the guards or military force that defends it). It gives those in charge some assurance that the bad guys will stay out, and the goods and people inside will remain undamaged. Blockchains are a new technology to create hardness in the digital realm: a smart contract deployed on a decentralized blockchain will behave predictably for some time, and its state is immune to being arbitrarily changed by external forces. The need for “hard” systems has existed for thousands of years. Such systems were built from matter and institutions and evolved over time. But the concept of “hardness” is new, which allows us to see what these things have in common, and to understand the utility of blockchains more clearly.

Hardness is important for businesses because being able to predict the future state of affairs is critical to making good business decisions. Who will own a particular asset one year from now? Will the data I rely on remain unchanged? If I engage in a transaction with another organization, will the terms of our agreement be confirmed? Will people with guns get in the way of my business? Sometimes these things are considered in Western countries, but in many parts of the world there is much less certainty because institutions are less developed, corrupt or completely missing. Lack of certainty creates risks and hinders business, and global companies are very aware of this.

Decentralization is critical to blockchain hardness because it means the system is immune to change by a small number of entities. The more decentralized it is, the more hardness it can provide. But a blockchain managed by only a few entities is more vulnerable to changes unforeseen and/or unwanted by others. Of course there may be times when it is necessary and appropriate to change some blockchain data outside of the usual course of business – for example, to recover stolen property or lost keys. An option for the appropriate people to make such changes can be designed into the system from the start if the need is anticipated. Blockchain smart contracts can provide flexibility where it is needed, and rigidity where rigidity is required.

Decentralized blockchains as a source of hardness have some advantages over institutions and matter. Matter is the oldest way to create hardness, but it is very limited in what it can do, and often cumbersome to manage. Institutions have the advantages of being highly customizable, customizable and even programmable (a written contract can be considered a program that is implemented by a legal system). But institutions are slow and inefficient – resolving a dispute and enforcing an agreement can take years, and is very expensive. There is also a high barrier to entry – building a new legal system or police force is no simple undertaking. Writing and signing legal contracts is relatively easier, but still involves significant time and cost, which creates friction that hinders business and economic growth. Blockchains are more accessible – almost anyone with some technical knowledge can write and deploy a smart contract. And enforcing the rules with smart contracts can be much faster and cheaper than using written agreements and lawyers and courts. So blockchain hardness can help give businesses a degree of certainty about what will happen in the future, and in certain applications it provides greater speed, lower cost, and more flexibility than matter and institutions.

With this framework in mind, using data from the recent EEA Business Readiness Report and other sources of information on the commercial use of blockchains, I explored the field of enterprise blockchains to see how well it fits. Here are some of the main categories of business applications involving blockchain, and how blockchain creates the “hardness” that makes them work.

  • Physical asset tokenization and trading: blockchains ensure that asset ownership records behave according to certain rules, and cannot be unilaterally changed. Examples: Agrotoken, RealT, SolidBlock, Kratos, Fasset, Arianee, Vakt, Blockchain for Energy.
  • Tokenization and trading of financial assets: blockchains ensure that ownership and transfer of assets behave according to certain rules that cannot be unilaterally changed. In some cases, the asset is defined by data on the blockchain. Examples:
    • Issuance and trading of bonds – Santander Bank, Societe Generale, Cadence, European Investment Bank
    • Rap business – Goldman Sachs
    • Receivables financing – Tinlake
    • Securities – Taurus, BSTX, tZero
    • Other – ConsenSys Codefi Assets
  • Tamper-resistant ledger applications, such as supply chain traceability and provenance: blockchains ensure that there is a single source of truth that many parties can see and agree on. Examples:
    • Supply chain traceability – Komgo, Covantis, Treum, CargoX, Morpheus Network, MineSpider
    • Provenance – Brietling (watches), Perroni (beer), DeBeers (diamonds), LVMH
    • Norwegian corporate property register
  • B2B purchasing and supply chain transactions: blockchains ensure that business rules and terms of agreements are followed and enforced, and that all parties can see and agree on one set of data that represents the state of affairs. Examples:
    • EY OpsChain
    • Baseline protocol – uses the blockchain as a common frame of reference and source of truth to coordinate B2B transactions off-chain.
  • Supply chain trade documentation: blockchains ensure that documents related to trade and imports are available to government agencies and others as needed and cannot be altered. Examples: Transmute
  • Parametric insurance: blockchains ensure that insurance purchases and payments are made quickly and efficiently and accurately, and that the terms of an insurance agreement are met. Examples: Etherisc, Arbol.
  • Identity, credentials and certificates: blockchains provide a permanent, public and falsifiable repository to store digital identities, credentials and certificates/certificates (and revocations). Examples:
    • Identity – Login with Ethereum, Decentralized Identifiers (DIDs)
    • Credentials and educational certificates – Verifiable Credentials (VCs), OpenCerts, BlockCerts, SkillTree, Dock
  • Tracking ad impressions and payments through multiple layers of ad network operators, distributors, publishers, etc.: blockchains create a neutral, single system of record that all parties can see and negotiate, without control from any dominant player, eliminating discrepancies in data and ensuring that transaction rules are enforced. Examples: AdLedger, EthereumAds.
  • Games: blockchains allow players to own in-game assets in a way that is not subject to the whims of the game vendor, giving them assurance that they will be able to maintain control of those assets and potentially even use them in other games. Examples: Decentraland, Axie Infinity, Gaimin.
  • Businesses themselves (corporations, LLCs, etc.) can be considered as institutions that create rigidity for the benefit of shareholders and other stakeholders. DAO offers a new way to do this.

In conclusion, there are many ways that blockchains can improve business operations or even enable entirely new businesses. In any case, the essential property that makes blockchains useful and valuable is that they provide certainty about what will happen in the future: ownership of assets, payments and other business transactions will follow predefined rules, and the rules and data in the system is very resistant to change by external forces. Previously businesses mostly relied on institutions such as laws and contracts and courts to achieve such predictability, but blockchains can do it better, faster and cheaper.

Thanks to Josh Stark, Andreas Freund and Dan Shaw for their input.

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