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Why do we need blockchain technology?

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There is so much hype swirling around blockchain technology at the moment that it sometimes seems to be the solution for all their existing problems. Across every industry, companies are rushing to implement blockchain solutions in their business models so they can say they are on the cutting edge of technology and innovation. This hype is not without reason. Proponents of blockchain technology say it can take out the middlemen in business transactions, saving companies huge amounts of money while increasing security and efficiency. But before we get carried away in the hype wave of blockchain excitement, it is worth looking at how it can be used and whether it is an appropriate solution to any existing problems.

Do you really need a blockchain solution?

There is a very real risk that some companies are over-eager to employ blockchain technology without exploring other options, thinking that it is the best solution to their problems. There are several costs associated with implementing blockchain and one must ensure that these costs will be offset by the potential gains. While it may not be as exciting, there are often quicker and cheaper ways to improve a business system simply by tweaking the existing established framework, rather than redesigning the whole process from the ground up with blockchain.

 

The first step you need to take before delving into blockchain technology is to understand what it is and how it works. You can read our previous article on blockchain technology to get a better understanding of the technical basics of blockchain. For our illustration purposes here, we can think of blockchain as essentially a database. Traditional databases are controlled by one central authority, who alone has the ability to input, alter and verify data. On the other hand, blockchain is decentralized, which means all members of the same blockchain network will hold a copy of the database, which they can add, edit and verify its data.

 

This multiple-user setup is a very useful feature in systems where there are several parties involved in transactions and you need to use trusted intermediaries to carry them out. However, if your company simply needs to keep track of internal transactions, then a traditional centralized database is probably still the best way to do it. Blockchain, being such a new technology, still has some issues with scalability which can make it slower than existing databases. Another downside is that blockchain users must pay a fee for every transaction they conduct on the database, which can change unpredictably over time and create unnecessary problems.

 

A good rule of thumb when considering implementing blockchain is “if it ain't broke, don't fix it”. Unless you can clearly identify examples of how blockchain will solve multiple issues with your current system, you might find the cost in time and energy to implement not worth it. Changing to an entirely new system and database is a big undertaking and it may take several years before the new system is up and running to see any advantages.

 

Ideal use cases for blockchain technology

Let's look at a particular business scenario and analyze the ways in which blockchain can be used to improve on the current system. Supply chain management has been identified as an industry that stands to benefit greatly from blockchain technology. As a product moves from its source to the consumer, it passes through many different hands, such as manufacturer, logistics company, wholesaler and retailer – or many more depending on the complexity of the product.

 

As an individual product goes through this supply chain, it is tracked by each operator in the chain with their own database and procedures. This means that to track and follow any item through the chain, you would have to examine all of the relevant databases for each individual step of the process in order to ensure that it is tracked correctly. Having so many different data sets to compare increases the potential points of failure in the system and makes it less reliable and more vulnerable to human error and possibly fraud.

 

There is also the problem of replication of work, if each operator in the supply chain manages and maintains its own database, they will collectively use more resources and people as compared to maintaining a single blockchain database that can be accessed by each operator through an online application platform. The same problem arises when you consider that each operator on the supply chain has to use a bank or financial service provider to pay the other operator that provides their stock. With blockchain, payment between operators could be settled with smart contracts and cryptocurrencies. This would take out the middleman and save each operator a considerable amount with reduced transaction fees and processing times.

 

Another benefit would be a huge reduction in the risk of fraud or human error distorting the database. As all operators need to reach a common consensus on every transaction, any intentional or unintentional errors can be detected easily and be trackable to a specific point in the system. As seen from this example, supply chain management is an ideal use case for blockchain technology as any costs associated with rolling out a new blockchain bases system would quickly be returned by benefits and efficiency gains.

 

Weigh the cost and benefits of blockchain

So when it comes to the potential advantages of adopting blockchain technology, it is essential to conduct a thorough cost benefit analysis to determine if it is an effective solution to your particular problem. While blockchain sounds like a great panacea for existing inefficiencies and is a great buzzword for attracting investors and impressing shareholders, it isn’t always the right solution.

 

Although many companies are rushing to implement blockhain solutions in order to minimize inefficiencies and improve their margins, not all of them will do so successfully. Those that will reap the most benefit from the blockchain revolution will be the ones that carefully analyze the best uses of the technology and implement it on opportunities to solve multiple problems with one single stroke.