Blockchain technology – Creating a decentralized future

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Published on February 22, 2017

“Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure; everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”

- Marc Andreessen, Andreessen and Horowitz Venture Capital

Recently, blockchain technology, the underlying technology of bitcoin, has received a lot of attention in the media. With governments around the world and Fortune 500 companies getting involved, there’s no doubt that the claims that blockchain is as big as the Internet was in the 90s is a valid comparison. In 2016, over US$1.4 billion was invested in the blockchain space so far.

What is blockchain?

To put it simply, blockchain is like an Excel spreadsheet on the internet where everyone can add lines but no one can go back and change or delete an existing entry. Each entry is a transaction where value is being transferred between parties—value being cash or any other asset. But how do the other spreadsheet users make sure that each line is accurate?

All of the people or businesses on the internet using the spreadsheet are represented by computers (or nodes) in the network. When someone wants to add an entry to the spreadsheet, in essence make a transaction, all the other computers in the network communicate with each other to determine who sent value to whom. The computers use a consensus algorithm to verify the transaction, and if someone tries to manipulate the system, the computers will know as the numbers will not add up and the transaction will be ignored.

Bitcoin is probably a term you have heard many times before associated with blockchain. There is bitcoin and there is Bitcoin. The first is the cryptocurrency—a cryptographically secured denomination of value that can be exchanged on the blockchain. The latter refers to the protocol, a set of rules integrated into the network’s infrastructure.

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Although Bitcoin is a popular protocol for value transfer, it does have its limitations. As a result, new protocols are emerging to address those limitations.

One of the most notable protocols is Ethereum. In addition to the distributed ledger characteristic of the Bitcoin blockchain, Ethereum introduces the concept of “smart contracts,” which are applications that run and execute on all computers or participants in a network.

Smart contracts are a significant innovation. They are scripts of code that allow you, as the user, to facilitate and execute an agreement. These self-executing applications make the network perform an action if a triggering event occurs. For example, you can pre-program code into a smart contract program to trigger a transaction that does the following: if you send me a token that represents ownership of a vehicle, then I will transfer you my payment (via a coin wallet). This is a simple demonstration of smart contracts in action. Smart contracts are being developed to handle very complex transactions, such as calling on future contracts on crop yields based on weather forecasts or stock voting based on the value of a share. Briefly, smart contracts are applications that allow for if/then transactions to occur between people and businesses on the network and that are secured against tampering in the same way as Bitcoin.

So who are all these parties? Who gets to see the transactional details? Permissionless blockchains such as the Bitcoin network allow anyone to read, write (append) and validate data on the blockchain, which is distributed with no single owner. Unlike the Bitcoin network, permissioned blockchains restrict access to authorized trusted participants (pre-selected nodes), who are the only ones able to directly access the blockchain data, submit transactions, and participate in the consensus mechanism. Such a blockchain may be either a public consortium network separate from the main Ethereum/Bitcoin network, such as arbitrary vendors being able to onboard themselves, or a private consortium, where participants are pre-configured and this network is not visible to a wider audience. What kind of blockchain is the right fit? It depends on the use case and the organization using it.

Blockchain technology offers the potential to impact a wide range of industries in transformative ways. The most obvious applications involve transfers of value or assets that are currently expensive, time-consuming, or require multiple organizations to carry them out. This has been driving investments in exploring potential uses of blockchain technology in the field of financial technology (“Fintech”).

Benefits of blockchain

Blockchain has five major benefits:

Improved data security and immutability The blockchain contains certain and verifiable record of every single transaction ever made. This prevents double spending, fraud, abuse and manipulation of transactions.

No intermediary – Blockchain technology is based on cryptographic proof instead of trust, allowing any two parties to transact directly with each other without needing a trusted-third party.

Near real-time settlement – Due to the peer-to-peer nature of blockchain, recorded transactions are settled near real-time, thereby removing friction, reducing risk but also limiting the ability to charge back.

Simpler and automated regulatory compliance – Regulatory conditions can be programed into the blockchain network created so that only regulatory compliant transactions are accepted. Additionally, blockchain can be used as a digital identity management grid, simplifying and automating KYC/AML processes.

Faster and lower cost of transaction – By eliminating third-party intermediaries and overhead costs for exchanging assets, blockchain has the potential to greatly reduce transaction fees.

Use cases

From supply chain management to identity management to loyalty points, there are hundreds of blockchain use cases across various industries, two of which particularly interest the CFOs of today’s businesses: billing and auditability.

Billing

The billing process that companies use to invoice and collect payments from their customers are time-consuming and costly. With blockchain, invoicing and payments can be automated via smart contracts. Companies can issue invoices on the network, either permissioned or completely public with permissioned layers that show invoice information, to only the parties involved. These invoices can rely on oracles of data to trigger payment. For example, if a supplier delivers materials to a customer, at the time of delivery both parties record the delivery and acceptance of the materials. This will trigger the payment of the invoices via a smart contract. Not only will this remove proneness to human error but it will also reduce transaction costs and latency.

Keeping in mind that blockchain is a network technology, your suppliers and partners will not be surprising you with their newly deployed blockchain-powered billing system tomorrow. In fact, they’ll be looping you into the conversations to design, test and deploy this system. Additionally, blockchain allows for the interoperability of different payment vendor software.

Auditability

Modern accounting is based on a double entry system—a system that proves to managers whether or not they can trust their own books. However, independent auditors like Deloitte also verify companies’ financial information. As we all are well aware, auditing a company’s records can be a costly and time-consuming activity. With a blockchain-based accounting system, companies can write their transactions directly into a joint register, creating an interlocking system of immutable accounting records. Records cannot be destroyed as they are sealed to the blockchain and all transactions are time-stamped. In brief, this could pave the way for improved financial reporting processes and enhanced internal control over financial reporting (ICFR).

Moreover, organizations like CPA Canada, the Australian Accounting Standards Board and the SEC are already investigating the implications of blockchain in audit and creating standards around it.

Overall, blockchain technology is expected to have as big an impact as the introduction of the internet had in the 90s. Many enterprises and governments, like Goldman Sachs, Mizuho Bank, Philips, BHP Billiton, Visa, the SEC and Nasdaq, are already investing in and testing the technology to see how they can use it to reduce costs and enhance operations. Therefore, it’s important for organizations to strategically identify opportunities that can be beneficial, whether from a financial perspective or otherwise.

Contacts

Mawadda Basir Mawadda Basir
Blockchain Strategist
Mawadda is a blockchain strategist with Rubix by Deloitte. Rubix is the blockchain development practice at Deloitte Canada and the first hub for blockchain activity in the global network. Rubix builds Dapps (decentralized applications) across a number of infrastructure platforms, leveraging the team’s deep blockchain technology development capabilities. In addition to Dapp development, we help clients understand and plan for a blockchain future.
Iliana Oris Valiente Iliana Oris Valiente
Co-Founder, Strategy & Execution Lead
Iliana Oris Valiente (CPA, CA, CBP – Certified Bitcoin Professional) is widely credited with being a trailblazer in getting Deloitte actively involved in the blockchain space, having recognized the tremendous impact for enterprise clients. Iliana co-founded and is the strategy leader of the Rubix by Deloitte blockchain practice, a team providing advisory services and building decentralized applications across multiple technology platforms. A chartered accountant by profession, her focus has been on exponential technology, entrepreneurship and bridging the gap between the corporate world and start-up communities.

To learn more about blockchain and how the Rubix team can help you prepare for a decentralized future, please visit rubixbydeloitte.com or email us at rubix@deloitte.ca.

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