Identifying Issues in the Business Network

It is important to have a clear idea of the scenario’s requirements, and to know which issues you are trying to solve. This might seem obvious, but with any new technology—and particularly a well-hyped one—there is often a temptation to jump to an implementation without a lot of thought about the problems it aims to solve.

Businesses act for several reasons. Most commonly, they are going after a new market (for example, opening trade finance opportunities to small/medium enterprises), or trying to remove cost or inefficiencies from a business process (for example, removing intermediaries). Identifying the issues and expressing them in terms of the expected gain (or return on investment) is the first step to a successful project.

Let’s return to IBM’s Global Financing blockchain solution introduced in Chapter 1. They identified that within this business network of about 4,000 participants that $100m of capital was in dispute at any one time. This was a significant liability, and was a direct result of the time taken to resolve some 25,000 disputes annually from the 2.9 million invoices issued. Examples of disputes include the wrong number of computer parts being delivered in an order or deliveries going awry. It was also noted that each of the 25,000 disputes would take on average 44 days to resolve, requiring someone to retrace steps through six or seven applications, including contacting third parties such as banks.

We can summarize the issues as:

1. Disputes arising due to consignment issues

2. No single source of trusted information to help resolve issues

3. Disputed transactions taking a long time to solve

In “The Blockchain Fit”, we’ll review these issues and see if blockchain can help to provide a sensible solution to resolve them. Before that, we’ll look at the benefits of a blockchain solution.

What Are the Benefits of a Blockchain-Based Solution? 

Blockchain is a solution for business networks. It makes sense to deploy a blockchain-based solution only where there is a network of collaborating participants who are issuing transactions around a set of common assets in the network.

Therefore, our first observation of when blockchain is the right solution is that there must be a business network of multiple participants. Our second would be that they require a shared view of assets and their associated transactions. 

We then use the following four key blockchain features introduced in Chapter 1 to further define the benefits of a blockchain-based solution. Let’s remind ourselves of these benefits:

Consensus

The process of agreeing on new transactions and distributing them to participants in the network.

Provenance

A complete history of all transactions related to the assets recorded on the blockchain.

Immutability

Once a transaction has been stored on the blockchain, it cannot be edited, deleted, or have transactions inserted before it.

Finality

Once a transaction is committed to the blockchain, it is considered “final” and can no longer be “rolledback” or undone.

There are several other blockchain benefits that underpin these four key benefits, and are worth keeping in mind as you review any potential scenarios:

Identity

All participants in a permissioned blockchain network have an identity in the form of a digital certificate—the same technology that underpins the security and trust when we use a web browser to access our online bank.

Security

Every transaction in the permissioned network is cryptographically signed, which provides authenticity of which participant sent it, nonrepudiation (meaning they can’t deny sending it), and integrity (meaning it hasn’t been changed since it was sent).

Contracts

Smart contracts hold the business logic for transactions and are executed across the network by the participants endorsing a transaction.

These benefits help engender trust between the participants in business networks, and we can use them as a litmus test when checking to see if blockchain is a good technology fit. We should note that while it’s not necessary for a scenario to require every benefit just listed, the more that are required, the more the case is strengthened for using blockchain.

We should always be wary of thinking that blockchain is a panacea for all solutions. There are many reasons why blockchain wouldn’t be a good fit. For example:

• Blockchain is not suitable if there’s only a single participant in the business network.

• Although we talk about transactions and world state databases in blockchain, it shouldn’t be thought of as a replacement for traditional database or transaction servers.

• Blockchain by design is a distributed peer-to-peer network, and is heavily based on cryptography. With this comes a number of nonfunctional requirement considerations. For example, performance and latency won’t match a traditional database or transaction server, but scalability, redundancy, and high availability are built in.

Assets, Participants, and Transactions

When thinking about a potential blockchain solution and the benefits it brings to the network of participants, it is useful to view it in relation to the following concepts:

• Assets

• Participants

• Transactions

We have already introduced some examples of these. They are core concepts in a blockchain network that benefit from the four primary trust benefits introduced in the previous section.

The Blockchain Fit

In an earlier section, we looked at the issues in the IBM Global Finance example that led to the implementation of a blockchain solution along with the benefits that a blockchain-based system can provide. We will now consider why blockchain technology was the sensible choice.

First and foremost is to check there is a business network in place. The IBM Global Finance system comprises some 4,000 suppliers and partners, as well as IBM within the network. So we have a good business network on which to consider the rest of the blockchain features.

As some of the disputes are related to differences between what was ordered and subsequently received, this can often be the result of different participants in a business network (partners, suppliers, and delivery companies) tracking goods in separate siloed systems.

Therefore, a shared ledger with consensus and finality provided by blockchain across the business network will help to reduce the overall number of disputes as it will give all participants the same information on the assets being tracked.

Furthermore, if changes to the data being tracked either intentionally or unintentionally are part of the root cause of these disputes, then the provenance and immutability features of blockchain could also help.

Last, we consider the amount of time taken to resolve these issues. As there were multiple systems (including third-party systems) that someone needed to check in order to resolve any transactions in dispute, having a single shared ledger that is maintained through consensus will help reduce the time taken to resolve them.

Some further observations about how a blockchain-based solution can benefit this business network:

• Each participant in the business network has an identity and is permissioned in the network. This could help with your processes related to Know Your Customer (KYC) and Anti-Money Laundering (AML).

• Smart contracts could be designed to resolve some of the disputes automatically by maintaining consistency across the business network and therefore further reducing the number of disputes.

Choosing a First Scenario

You may be considering multiple scenarios where blockchain provides a good solution fit. In this case you will need to compare each to determine which is the best scenario to work on first.

We recommend a simple approach for comparing each scenario using a quadrant chart, where each is placed on the chart based on its relative benefit and simplicity. 

In Figure 2-1, the x-axis is the simplicity of the scenario (simpler to the right) and the y-axis represents the benefit (more beneficial to the top). Place each scenario on the quadrant chart, considering its expected benefit and simplicity as a blockchain solution. This is best done as a group exercise with appropriate stakeholders who can provide the necessary insight to where each scenario falls in the chart based on level of simplicity and potential benefits.

Once all scenarios have been plotted on the chart, it becomes obvious which are the first scenarios to concentrate on—those that will provide the most benefit and are the simplest.

Figure 2-1. Comparing scenarios based on their benefit and simplicity

Transforming the Business Network

Once your first blockchain scenario has been identified, you will want to move to the next phase: building the Minimal Viable Product (MVP). An MVP represents the minimum product that can be built to accomplish a goal of the blockchain scenario.

Starting a MVP with blockchain shouldn’t be dissimilar to any other technology, and good software engineering practices, such as using Agile principles, will always be applicable. Following are some observations that will help as you start to transform your business with a new blockchain-based solution:

• Blockchain is a team sport. There will be multiple stakeholders from different organizations in the business network. Some of these organizations may not have traditionally worked directly with one another. Therefore, a clear understanding of the requirements and issues across all participants, and clear lines of communication and agreement, are critical to the success of the project.

• Use design thinking techniques that focus on the goals for the user, to agree on the scope of the MVP.

• Use agile software engineering best practices, such as continuous integration and stakeholder feedback, to iterate throughout the development of the MVP. Keep stakeholders informed and act on feedback.

• Start with a small network and grow. There will be some challenges ahead, as this may be a paradigm shift for the business network.

• If replacing an existing system, consider running the blockchain-based solution as a shadow chain to mitigate risk. By this we mean, during the pilot phase, run the new platform alongside the legacy system. Ideally, you would pass real production data to the new blockchain-based system to test and validate it, while continuing to rely on the legacy system for this phase of the project. Only after thorough testing has been completed and the new system has been proven should you switch from the legacy system to the new.

• Although blockchain is likely to be a core foundational part of the solution, it probably won’t be its majority. The blockchain network will still integrate with other external systems, providing additional functions such as off-chain data storage, identity access management, Application Programming Interface (API) management and presentation layers, and so on.

Growing the Business Network

With a blockchain-based solution it is advisable to start with a small network and then grow. What does growing the network mean? It can mean adding any of the following:

• Network participants, i.e. those participants in the network running peers

• Applications interacting with the network

• Users of the blockchain-based solution

It may also mean increasing the following:

• Smart contracts

• Channels or subledgers for privacy between network participants

• Transaction throughput

• Number of assets

There needs to be a strong democratic governance model to manage these types of changes as they are made to the blockchain network. Remember, no single organization is in control.

This is one of the areas that sets a blockchain-based solution apart from other technologies. For example, there are changes within the network that require multiple participants (organizations) within the network to agree before the change can come into effect. The following are two examples of changes that require this type of agreement.

1. An existing network consists of three participants: Dave, Matt, and Luc. John would like to join the network. For John to join the permissioned network, Dave, Matt, and Luc must each cryptographically sign the configuration change before John is allowed to connect to the network. Of course, this is one option of managing this scenario; alternatively, if only one network member is needed to approve such a change, then the network can be configured accordingly.

2. A new smart contract is to be installed on the network, and both Dave and Matt’s organizations will be required to endorse transactions for the new smart contract. In this scenario, both Dave and Matt are required to install the smart contract to their peers, and ensure the smart contract is instantiated on a shared channel (or subledger) before a client application.

Ten Questions to Explore the Scenario in More Detail

So far, we have taken a fairly high-level look at whether blockchain makes a sensible choice for the scenario. We can of course explore the scenario in much more detail to help identify the suitability of blockchain, and to start mapping out the type of network that might be involved.

The following questions will help in understanding the scenario from a blockchain perspective:

1. What is the specific business problem or challenge that the scenario will address?

2. What is the current way of solving this business problem?

3. Assuming the business problem is large, what specific aspects of this business problem will be addressed?

4. Who are the business network participants (organizations) involved and what are their roles?

5. Who are the specific people within the organization and what are their job roles?

6. What assets are involved and what is the key information associated with the assets?

7. What are the transactions involved, between whom, and what assets are associated with transactions?

8. What are the main steps in the current workflow, and how are these executed by the business network participants?

9. What is the expected benefit of applying blockchain technology to the business problem for each of the network participants?

10. What legacy systems are involved? What degree of integration with the legacy systems is needed?

Again, working through these questions with the appropriate stakeholders (business, technical, and users) and capturing the results will help enormously before moving the project to the next phase, such as a MVP.

Commercial Paper: An Example Scenario

The Linux Foundation Hyperledger Fabric community has produced an excellent set of materials around the scenario of Commercial Paper. For more information on the scenario, you can go here.

We will come back to the commercial paper scenario in later chapters, but we introduce the concepts of a commercial paper business network here, and see why blockchain makes a good technology fit.

Commercial paper is a debt instrument issued by a company that needs to overcome its short-term financing needs. The commercial paper is sold to another company that can redeem the paper at a later date for a higher value than they paid for it. This provides short-term funding to the company issuing the commercial paper, and provides a return on investment for the company that buys the commercial paper. Commercial paper can be resold to other companies during its life cycle.

Earlier in this chapter, we introduced the concepts of assets, participants, and transactions. Let’s look at commercial paper through this lens.

Summary

In this chapter we have seen the importance of identifying a blockchain scenario’s requirements and any issues related to the scenario being considered. We then learned how the four key benefits of blockchain (consensus, provenance, immutability, and finality) help to determine if blockchain is a good technology fit, while ensuring there is always a business network of multiple participants. Using the blockchain concepts (assets, participants, and transactions) will help guide the decision and aid users in understanding how blockchain might be applied to the business network.