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Blockchain solves the problem of Trust in business. We no longer need to rely on centralized authorities.
You’ve probably heard how Blockchain is driving digital transformations.
In fact, areas like supply-chain management, trade finance, insurance, and even cybersecurity have gone far with such transformations.
Also, banks and financial service institutions are using blockchain to transform their businesses.
But there are lots of misconceptions out there about Blockchain. And this is so serious to the point that most companies stick to technical details and fail to understand exactly how this technology can create value for their business.
Blockchain is not a silver bullet that can solve all problems. That’s to say, knowing where it can, and where it can’t help you is a critical first step.
And so today, I’m not going to enter technical implementation details like the bitcoin cryptocurrency. Blockchain is much bigger than that.
In short, Blockchain does not only enable peer-to-peer exchange of value like money, but it goes beyond that to enable the exchange of securities, and even intellectual property.
So I’m about to show you what you need to know about Blockchain as a business leader. And I hope you walk away with a clear understanding of what it is, how it works, and its implications to business strategy.
I. The Problem of Trust in Business
In this digital age where anyone can pretend to be what they’re not, trust has become a scarce asset. And we’ll see how Blockchain helps establish trust.
But what do we mean by trust?
Trust is the expectation that the other party will act with integrity.Don tapscott, author of blockchain revolution
And integrity boils down to these four values: Honesty, consideration, accountability, and transparency.
- Honesty means not lying through omission, and not trying to hide ugly facts in a maze of other facts and figures.
- Consideration means all parties care about each other operate in good faith.
- Accountability means making clear commitments and sticking with them
- Transparency means operating in the open, in the light of day.
But how often do people live up to these values when doing business?
If everyone respects commitments, then courts will not spend time resolving disputes.
In addition, it’s important that everyone involved in partnership should be able to verify trust, and outside experts should be able to do so as well.
Of course, companies have the right to guard their trade secrets and other kinds of private information. But there are things that we need to know, as customers, as shareholders, employees, and so on, for us to make smart decisions.
Trust in business is at an all-time low
And it’s not only in businesses. Even institutions in the world.
For instance, a recent report from Edelman, a public relations company, shows that trust in institutions has taken a staggering hit in the last period.
People find it hard to trust their governments. They find it hard to trust media and technology companies like Facebook, Google.
All these suggest, that somewhere, people are not holding to their promises.
We did business face-to-face with people we knew. Now we often can’t know who we’re doing business with online let alone whether or not people have integrity.
So we’ve come to rely on third parties to vouch for strangers, when doing business online.
Third parties like banks, governments, and platform businesses like Paypal, Uber, Apple, and so on.
But there has been a lot of talk about some of these third parties violating user privacy.
The transparency and trust built into blockchain will start to rebuild the trust in our institutions.
II. How Blockchain solves this problem
Think of Blockchain as database, or spreadsheet. But not like a traditional database that’s centralized in a server somewhere, but as a database shared across a network of partners.
That’s to say each participant has a computer. And so the idea is that at any moment in time, simultaneously, each member of that network holds an identical copy of the blockchain database on their computer.
That’s the essential principle.
In addition, the records on the blockchain are traceable and available to all participants the partners.
- All records and agreed rules are immutable, meaning no single party can modify them. All parties must confirm before any modification, in what we call consensus. That’s integrity.
- There’s no centralization and management of the database by a single entity. All partners have a copy of everything going on. No one can hide anything. And everyone can see an audit trail of past transactions. And by so doing, blockchain solves the problems of transparency and truthfulness.
- And the fact that smart contracts execute automatically means keeping to promises is not an option, it’s automatic. That’s how blockchain solves the problem of accountability.
For instance, if you’re recording things like property titles, you can see a previous owner of the property and the current owner. You’ve got this perfect audit trail. And that’s how blockchain enforces transparency.
So you do your business in peace, even with strangers.
In short, blockchain has proven to be very effective in environments where you need to have a decentralized way of working, and where you’re looking to take out a centralized entity and build trust among parties.
And that’s how blockchain solves the problem of trust in business transactions.
III. Blockchain and Business Strategy
Like other digital technologies, it’s not enough to adopt blockchain.
Let’s dive deeper into the value blockchain can create for your business.
It’s true blockchain helps to solve the problem of trust, but how does this translate to give a company strategic advantage? And how does this help in digital transformation?
It turns out that helps in two ways: (1) lowering operating costs, and (2) enabling new business models.
Blockchain lowers the cost of Searching for Partners, Employees and Money
How do you verify trustworthiness when you want to engage with a business partner?
In most cases, you rely on what they tell you, what they show you, and what others say about them.
And it takes time and resources to select the right ones.
On the other hand, it’s often hard to verify this trust, and you get to verify this only when you’re already in an engagement.
On blockchain, the history of all transactions appears as they occurred. And no one can tamper with it to pretend to be what what they are not.
And this confidence keeps you from incurring additional cost to verify the credibility of potential partners.
In addition, it’s becoming less costly to raise money with new crowdfunded models like Initial Coin Offering (ICO) built on the blochain. That’s to say you save yourself the cost of hiring institutional investors to help you raise capital.
Blockchain lowers the Cost of Contracting
Smart contracts on blockchain are self-enforcing.
Meaning they execute automatically as per the agreement the company made with stakeholders.
So your company will save the time and money used to hire attorneys, or for dispute mechanisms.
Blockchain lowers the Cost of Coordination
As you know, coordination is key when you deal with partners outside the boundaries of the company.
Fortunately, the blockchain platform linking your company and partners can implement accountability automatically.
So you don’t need to count on partners’ goodwill, neither do you spend time and money to follow-up and ensure each partner does what was initially agreed.
The blockchain code automatically enforces truthfulness, consideration, transparency and accountability.
And so you eliminate the agency costs that usually result from executives acting in ways that are not in the best interest of the company.
Blockchain lowers the cost of building trust
Are you considering building an ecosystem of external partners as part of your digital transformation strategy?
Trust is key to the success of any ecosystem.
And a lot of companies spend significantly to build and enforce trust-worthy relationships.
Similarly, smart contracts include incentives for innovation and productivity. So your company can focus on value creation, instead of worrying about partners that are not acting as per agreement.
Blockchain powers new business models
Smart contracts can act as autonomous agents on behalf of whoever set them in motion.
And so blockchain opens possibilities for new business models, that were not possible before.
Here are some business models, powered by blockchain.
- Blockchain Cooperative: like a blockchain-based Airbnb or Uber, where people pool their resources and share all of the value created. For instance, owners of apartments will be able to exchange value directly with customers, and choose who can tap value from their data. This is unlike the current model where Airbnb centralizes and controls all data and transactions.
- Peer production: for instance, imagine a blockchain-based versions of platforms like Linux or Reddit, but where everyone is rewarded for the value they create, and docked for bad behavior.
- Micro metering: where people can rent out their excess resources like Wi-Fi hotspot, electricity, computer processing power, and other assets when they’re not in use.
- Platform building: creating open source platforms for others to use and to build upon.
- Making of things on the blockchain. Coordinating capital, talent, and assets to manufacture goods and deliver services from design right through to final usage on the blockchain.
And to Conclude…
So we’ve seen that Blockchain technology essentially solves the problem of ‘Trust’. And a lot of businesses and institutions are using Blockchain capabilities for digital transformation.
Also, beyond reducing costs, this technology also enables exciting business models based on its ability to eliminate third parties.
We still have crazy stuffs to explore on Blockchain. So stay tuned for more in coming articles.
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