Blockchain is forcing us to rethink business processes

Blockchain has the potential to revolutionize the way we do business. With blockchain, technology becomes the impetus for the development of new services, explains Simon Ousager.

A new digital economic reality. This is what blockchain technology has the potential to create. In the simplest terms, blockchain makes it possible for two parties to do business online without the need for verification by a third party. And third parties are precisely what makes transactions time-consuming, expensive and centrally managed.

Bitcoin was the first decentralized blockchain with the capability for fast, direct transfer of assets over the internet.

“With the Bitcoin system, you have an infrastructure which runs independently of what its users think and do. It’s fundamentally different than the way we are used to building systems,” says Simon Ousager, an independent consultant at Paradigm Consult, where he is responsible for courses, talks and analyses about digital currencies – including Bitcoin.

“The financial sector currently bases its systems on the agents and interests they are designed to serve, and on how they can be integrated with the authorities and the regulatory framework. This is a classical, slow way of building systems. With Bitcoin, this model is turned on its head: the system can perform x transactions per second, you have security which is guaranteed by a mining process and a large degree of trust in the system. This is the platform you build your services on,” says Ousager.

Compliance as software

It will be interesting to see what services will be built on the platform of a decentralized system “that just works”. Because asset transfer via Bitcoin depends on stock exchange price discovery, brokers, merchants who make it possible for ordinary people with credit cards to buy Bitcoins, a certain degree of liquidity and a certain volume of order books in the system.

Blockchain also has the potential to challenge the traditional systems in relation to compliance, which currently constitute a rapidly growing expense for banks and their customers. For example, when background checks are performed on new customers, when suspicious transactions are reported, or when the recipients of foreign transfers must be identified to ensure that they are not involved in money laundering.

“Blockchain means that you suddenly have the option of building the compliance layer on top of the technology in the form of software. The software can identify different wallets on the blockchain precisely because this is public information. This is normally a complicated process requiring manual resources,” says Ousager.

By programming directly to the technology rather than for the banks, it becomes possible for companies to move into the payment sector without violating the law and without the need for huge investments and the support of major banks, he stresses.

Decentralized strength

Defining blockchain precisely is not easy. Originally, the term was coined to describe a specific technology in connection with the launch of Bitcoin, the first use case, in 2009. The blockchain technology was described as a group of transactions held in a so-called block merged with ten minutes of intensive computer computations.

The ten minute timestamp is the only ‘objective’ way for a computer to understand time: while a computer does not know what time it is, it can verify that certain calculations take a certain amount of time. For this reason, the technology was originally also called ‘time chain’.

Transactions involving assets –in this case Bitcoins – are combined mathematically and can be solved by a computer tasked with solving these random computations. The computations are linked together in a chain, and the ‘right’ chain is always the chain with the most calculations behind it. This exercise is also called mining, because new Bitcoins are ‘mined’ by the computer. The system is based on transparency in relation to the number of Bitcoins in circulation at any given time, and that the amount is increased periodically according to a fixed rule.

“The strength of Bitcoin is that everyone has always been able to participate in the network. No central players can modify the list of transactions. In this sense, the system operates based on a mixture of technology and game theory,” explains Ousager.

However, he thinks that the concept of ‘blockchain’ has become less clearly defined with time, in line with its increasing popularity:

“Blockchain has been hyped to an extreme degree precisely because the technology was vaguely defined from the beginning. A lot of people have pitched business models and projects based on blockchain technology without understanding or defining what it actually is. This means that today, blockchain is everything and nothing,” says Ousager.

Smart contracts

Another widely used platform for blockchain prototypes is Ethereum, which can be used to create ‘smart contracts’. Users define what conditions the contract must include before an agreement can be concluded.Everything is arranged using codes, and potentially without the involvement of a centralized managing authority.

“This means that there is no counterparty risk. The parties to the contract don’t need to know each other, because the code describes the conditions for the agreement. One example could be a user who sells concert tickets using a smart contract. In this case, the buyer would automatically receive the ticket, while the seller would automatically receive payment in digital currency,” explains Ousager.

Experts predict that smart contracts of this type will come to play an important role in the financial sector, for example in relation to securities trading.

Overhyped?

The blockchain trend has been particularly strong in the financial sector. Banks are naturally interested in smart currency transaction systems, and a number of IT companies have been quick to offer them blockchain-based solutions.

Among the first of these companies was Ripple Labs, which developed a decentralized ledger and its own cryptocurrency. But after a short time on the market, the business received a large fine for failing to incorporate adequate know-your-customer (KYC) rules into the system. And today, Ripple Labs no longer markets itself on the basis of blockchain technology.

A few years ago, R3 CEV, a consortium of banks and financial institutions, also announced that they were going to create blockchain prototypes and develop joint blockchain-based projects for the banks. Today, references to the technology are virtually absent from their website.

“The financial sector was attracted to the idea of being able to perform transactions in real time or with very short delays. In itself, this is revolutionary. But the original characteristics of the technology, which were about decentralization, transparency (blockchain software is Open Source, and data is public, ed.), and the absence of censorship, are not included in the IT systems which have been developed for the financial sector,” says Ousager.

And according to him, there’s a good explanation for that:

“The banks aren’t interested in a technology that’s too decentralized – or in having every transaction accessible to everyone. And they also have an interest in being able to change the history of a transaction, because errors can occur, or because the authorities may demand changes in a database.”

Pseudocode

Blockchain technology is still in a very early phase of development. And so Ousager doubts that producers are ready to build commercially viable blockchain platforms yet, because there is still uncertainty about what the technology actually is, and how industries and companies can collaborate on it. He thinks that the IT industry’s task is to facilitate discussion about the possibilities offered by blockchain:

“Blockchain forces us to think business logic in terms of codes. Alle of the business processes, such as know-your-customer rules, compliance, collaboration with other companies, and so on, can be reconceptualized as something which can be programmed. And that’s precisely where I see enormous potential,” he says.


Who's Who:

Name: Simon Ousager

Age: 30 år

Career: Independent consultant at Paradigm Consult and develops compliance software for Bitcoin. Has worked with blockchain technology for the past four years.

 

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