A Practical Guide To Navigating Blockchain Solutions

As pointed out during the second edition of the OECD Blockchain Forum (12-13 September 2019) by major blockchain thought leaders, the next 12 to 18 months represent the real transition between testing a nascent technology and large-scale implementation. To back this argument, Gartner predicts that by 2023, blockchain will support $2tr in international supply chain exchanges. It will be interesting to observe whether companies are anticipating these changes and ramping up their plans accordingly.

BLOCKCHAIN UNIQUE FEATURES

Blockchain is a technology that belongs to the broader DLT (Distributed Ledger Technology) family. A ledger is essentially a record of transactions and associated data/information. Until recently, the only credible way of running a ledger was through record centralization held by one unique authoritative party. This has consistently, and legitimately, led to trust issues. According to the 2019 Edelman Trust Barometer, financial services is once again crowned as the notoriously least trusted industry.

Blockchain provides a solution to this fundamental trust issue via 4 main functionalities:

• A decentralized decision-making process also known as a consensus mechanism.
• A distributed ledger (golden source) that every member of the network individually possesses.
• A quasi-immutable/tamper proof blockchain architecture (through a unique cryptographic hash that identifies a block and chains blocks together).
• A traceable and auditable time-stamped sequential ledger.

SOME OTHER DISTINCTIVE CHARACTERISTICS

 There is a cohort of side benefits that blockchain brings to the table. Hereunder is a non-exhaustive list of advantages:

• Greater transparency for regulators.
• Adapted and tailored privacy and anonymity settings.
• Enhanced security via cryptographic methods.
• Improved operational efficiency within organizations (streamlining of processes) and between organizations (reduction of intermediaries).

AN 8-STEP GUIDE TO NAVIGATING BLOCKCHAIN SOLUTIONS

1. Storage Constraints

A blockchain is a ledger of transactions (currency or any other type of data) which is distributed across all participants in the network (also known as nodes). The specific “distributed” feature of blockchain means that all parties possess an identical copy of the ledger. This leads to large amounts of the same data being replicated across many locations. The following example illustrates the storage issue in numbers: A central authority holds the ledger for 1000 customers. Every day, each customer transfers 1 Megabyte of data. Over a year this adds up to the central authority storing 365 Gigabytes of data on its ledger. When considering a blockchain network, this number is multiplied by the number of participants in the network (in this case 1000). The blockchain network represents 365 Terabytes of data stored. When coupling a broadening network to a growing blockchain, one can imagine the potential consequences on enterprise systems and connectivity. The strain on resources to cope with this would most heavily be felt in the SME space. It is therefore important to understand how different solutions in the market resolve this conundrum (off-chain storage, side-chain architecture, storJ, IPFS…).

2. Energy Consumption

Blockchain technology uses consensus mechanisms to securely add blocks to the blockchain. These algorithms can be highly energy consuming depending on the level of trust a blockchain network requires. As blockchain networks scale up and businesses move towards more sustainability, it is important to take this aspect into consideration. Public blockchains such as Bitcoin generally use the energy-intensive Proof of Work (PoW). It is estimated that Bitcoin consumes annually as much electricity as Austria! In the case of permissioned and private blockchains, there may be a need for a less strict fault-tolerant mechanism as the nodes within the network are supposed to be “trusted” counterparties in the first place. There is a whole host of less energy-hungry options available such as Proof of Stake (PoS), Delegated Proof of Stake (DPoS), Proof of Authority (PoA), Practical Byzantine Fault Tolerance (PBFT), Directed Acyclic Graph (DAG)…

3. Security

Security encompasses a broad range of topics such as cryptography and cyberattacks. According to a 2018 report written by McAfee and the Center for Strategic and International Studies (CSIS), cybercrime cost the global economy almost $600bn. They are at the heart of blockchains success or failure to gain mainstream adoption. Major hacking incidents that have taken place represent a major concern for companies considering whether to move to blockchain-based solutions or not. A blockchain solution provider should therefore have clear answers regarding the following questions (non-exhaustive): What governance is in place to deal with these threats and reduce risks? Are all three layers of blockchain infrastructure secure (protocol, network, applications)? Are there different nodes with different functions in the network to increase security? Is a central authority in charge of accepting new nodes on the network? How are external attacks prevented?

4. Privacy

With security, privacy and anonymity are atop the main features of blockchain. Sensitive information, such as names and addresses, transmitted through transactions need to be visible only to the parties concerned and unreadable to all other network participants. Targeted questions should be raised regarding how this is set up: What cryptographic methods are used to ensure privacy and anonymity/pseudonymity? What are the advantages and flaws of that choice? If information regarding one of the party’s changes, how can this change be appended to the block/transaction? Is versioning via side-chains a solution?

On a regulatory front, GDPR, which focuses on data privacy, stipulates that individuals should have a “right to be forgotten”. This regulation clashes within the financial services sector with Mifid II regulation that obliges banks to retain relevant data for 5 years. Similarly, blockchain’s immutability feature clashes with “the right to be forgotten”. Blockchain providers therefore need to work within regulatory frameworks to provide adapted solutions to privacy and anonymity.

5. Interoperability

Just like any new technology being developed, there are varying solutions that appear on the market each with their specificities and advantages. Blockchain is no different and as such, no market standards have yet been reached to drive mainstream adoption. A question often raised at this stage of technological maturity is the compatibility between solutions. For example, if someone is dealing on a blockchain, is it then possible to transfer onto another blockchain through API connectors?

Interoperability should not only be thought of, narrowly, in technological terms, it also relates to processes and data models. Therefore, what is the appropriate framework and governance that needs to be put in place to seamlessly integrate a blockchain to the internal IT and business infrastructure?

6. Scalability

Scalability describes the ability of any process, software, network or organization to grow while maintaining an equivalent level of performance. Blockchain networks have so far demonstrated poor scalability. Some use cases will be looking for throughput (transaction speed), others will require being able to transfer heavier transaction or data loads. It is important to obtain answers to the following: What is the block generation time? How quickly is the block broadcast to the network? How many transactions can be done per second? How does performance change when modulating the complexity of the use case requirements (smart contract/transaction characteristics)?

Scaling-up can also lead to infrastructure robustness issues. How is performance impacted when nodes are added to the network? How does the network manage cases where nodes go offline or during system crashes? If networks prove to be significantly slower than conventional databases, is it the right time to move to a blockchain-based solution?

7. Regulation

Use cases can be broadly categorized in two areas: recordkeeping and transactions. Depending on the case, the level of regulatory constraints varies. Legislation is starting to be developed on ICOs, utility and security tokens but grey areas still need clarifying both locally and internationally.

The issue of legal validity of smart contracts raises a considerable number of associated questions. For example, can code be considered legally binding? Does prose need to be added to smart contracts to acquire a legal status? How can bias be measured and contained when generating smart contracts? How can it be proven that smart contracts will preserve customer best interest on a blockchain network?

8. Usability

Although the blockchain community is global and projects are often open source, support tools for developers remain scarce and need to be further developed.

As customers are at the heart of the functioning of every business it is necessary for blockchain solution providers to also define and offer robust help desk assistance to support the blockchain transition.

CONCLUSION

It is easy to get lost in the ecosystem of blockchain solutions that currently exist. In following this approach, it is possible to compare different available solutions in the market, rank them according to characteristics and focus on the most important criteria that applies to the use case considered.

In this article we reviewed the first, technology-focused side, of a twofold transition process to blockchain. The second is business-focused. The potential impact of blockchain adoption on the core business model and revenue model of a company can be massive. These critical implications need to be analyzed well in advance. Proposing an approach to assessing use cases in the financial and capital markets industry will be the central focus of a following paper in this series on blockchain.

Contact our experts and learn how DXC is assisting on this transitional and transformational journey, by providing expertise on the technological complexities and guidance on the implications for business activities.

About the authors

	Shahin Khalessi is a Senior Consultant for Banking and Capital Markets in Paris. Following a career as a Derivatives Trader in London and Paris covering European and US markets, Shahin now provides expertise and support in financial institutions on their organizational and strategic transformation journey.
	Julien Benitah is the Partner leading the Banking and Capital Markets practice in Paris. He spent his career within strategy and business consulting firms, providing expertise and supporting operating and business models transformations for the financial industry.