Monday, May 27, 2024

BLOG | Embracing blockchain while avoiding the pitfalls

luis pineda

Sometime during the mid-1990s, the Internet left the deeply geeky preserve of Usenet developers and Silicon Valley garages and went mainstream.

Interest was huge and investment in dot-com business models and applications exploded. Everyone knew that these emerging technologies would be transformative, even though back then few, if any of us, could grasp the full potential.

Blockchain is having a similar moment. Once limited to the deeply technical and slightly murky-seeming world of Bitcoin traders, blockchain technologies have come into the open — and the commercial world has taken note.

Last year, venture capital firms and others have poured over $1 billion into blockchain-related startups, and another billion is expected to be invested in similar efforts this year.

Leaders across industry do not want to miss out on what could be the most disruptive technology to hit the business landscape in a decade or more.

Part of the allure is the enormous potential of distributed ledgers — as blockchains are commonly known — to improve the security, transparency and efficiency of transactions, not just in currencies, but over a wide range of marketplaces, including the long, complex supply chains that for many businesses stretch the globe.

Today, an auto parts dealer in Michigan might wait weeks for an Asian manufacturer to remit payment. Over that period, that payment has to wind its way from the manufacturer’s accounting department to its local bank to that bank’s central office, then into a correspondent bank.

The process involves multiple ledgers, different routing numbers, and lots and lots of hands, until the payment finally works its way into the auto dealer’s accounts receivable. Should any party have a question along the way, paperwork must be tracked down, voicemails left and returned, and specific databases consulted.

It’s little wonder then that blockchain is arousing such interest. Distributed ledgers allow such transactions to be completed within minutes with complete transparency on all sides. If a local tax authority comes swooping in to audit, the merchant can show with precision what amounts were paid and when. And if the buyer indicates the wrong SKU was sent, both the buyer and vendor can open the transaction trail to see when or if the shipment went awry.

As importantly, the most advanced industry applications harness the power of “hyperledgers” that aren’t reliant on anonymous trading and virtual currencies. Instead, they provide a permissioned network with known identities that allow companies, suppliers and partners to keep common records in an environment that is all but unhackable.

But not all blockchain technologies are created equal. Organizations may invest heavily to find that, as with the dot-com boom, for every promising avenue, there are many more dead ends.

Without a concrete understanding of the desired outcomes and the different elements and parties that must come together to make them happen, institutions may fail to get the returns they were hoping for.

To get the most from one’s blockchain investment, organizations need to get a few things right at the outset. First, while it’s often desirable to define an ambitious strategy of a moon shot, it’s usually better to pick a humble starting point then scale from there. A good use case should be practical, top-line oriented, and have senior leadership backing. If it’s too discrete, the investment will benefit only a narrow slice of the business.

Second, not all blockchain platforms are suitable for the same purposes. Some are appropriate for high value, point-to-point transactions and others for high volume transactions. Some are built on open-source platforms, others on proprietary languages that may have a limited developer base. Engage your IT team, outside experts as needed, and your end-users to clarify needs and identify the most suitable technologies to address them.

Third, involve your key suppliers and customers. One of the most exciting aspects of permissioned ledger environments is the network effects they create: the more participants, the more value. In developing that ecosystem, it’s again best to start small. Often a pilot run in partnership with a trusted supplier can provide proof of concept, inculcate new ways of working, and shine a light on legal and process changes that need to be considered.

Finally, recognize that blockchains are dynamic. The technologies are still advancing and so, too, the applications. Teams need to go into the project with an open mindset and be prepared to adapt, refine and collaborate ? and, as importantly, measure and report results. Company leadership plays a strong role in setting that tone ? giving teams permission to experiment and allowing them to fail fast so they may succeed faster.

Distributed ledgers have the potential to radically reshape the transaction environment, speeding results in complex, multi-party environments with unmatched security and transparency. By approaching their blockchain investments in a calibrated fashion, organizations can shorten their learning curve and sharply increase the probability of success.

The author is the president and country general manager of IBM Philippines


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