Blockchain: Why It will Change Everything

The advent of blockchain, in the view of believers, will be more transformative than the Internet. It will enable disintermediation and allow for direct interface between users and suppliers, creating demand-supply matches that will revolutionise both efficiency and customisation, saving cost but even more, building scale and speed. It is in many ways the finest manifestation of the trust economy. Whilst it is fashionable to link blockchain to digital currencies, the underlying technology is so much more than that. It is a vast, global distributed ledger or database running on millions of devices and open to anyone, where not just information, but anything of value – money, titles, deeds, music, art, scientific discoveries, intellectual property, and even votes – can be moved and stored securely and privately. Blockchain demands a re-think of business, of the risk of competition and changing business structures quite unlike what we have seen in the past.

A Revolutionary Rechnology

Blockchain, a peer-to-peer network, first surfaced in 2008 as an element of Bitcoin, a digital system that issues and transfers ‘virtual currency’, and manage transactions between users. Similar to TCP/IP, which dramatically brought down the cost of Internet connections, a Blockchain system enables vastly-cheaper financial transactions. The Internet changed lives by solving problems related to information (such as with content and search), communication (via email, chat, and social networking), and distribution (e-Commerce, music, videos). However, it did not solve for two other problems: disintermediation, and trust. In fact, it created even more powerful intermediaries – Google in the realm of information, Facebook in communication, and Amazon in logistics, to name a few.

Blockchain promises to solve the trust and disintermediation problems in a simple and scalable way. Traditional business models depend on an intermediary that consolidates information from both parties. Blockchain, by contrast, can distribute and replicate a ledger across the network in microseconds, obviating the need for an intermediary to validate a transaction or a transfer of ownership. Blockchain runs on the concept of distributed trust - much like how the lucky draw in a kitty party works: no fraud can be committed unless the entire group is involved. Any change in information in one block requires a consensus of the majority (at least 51%), making the blockchain almost impossible to hack.

Blockchain can run software and applications in a secure, democratic and decentralised manner. It is also encrypted, using private and public keys to maintain security. The software applications are not required to be deployed on a central server. Instead, they can run on a peer-to-peer network that is publicly visible, but not controlled by any single party, lending massive capacity to run on millions of devices and applications. It is built on an open source platform (Hyper Ledger) that runs of existing infrastructure, including network servers, and on universal coding languages such as C++ and Java, whose scripts are widely available.

Blockchain ensures integrity and trust between strangers. Trust is established not by powerful intermediaries like banks, governments and technology companies, but through mass collaboration and clever coding, making it difficult to cheat. It enables an open traceability protocol to track the ‘provenance’ of anything from coffee beans to diamonds. Once data has been written into a blockchain, it cannot be changed. This data immutability comes from blockchain’s built-in code and pre-agreed rules, which are kept in sync with a peer-to-peer mechanism. As in the case of the Bitcoin, each block houses information that is linked to a new block to create a chain, hence the name Blockchain.

Opportunities and Challenges for india

As a technology, blockchain is still in its nascent stage, but the Indian government has expressed great interest in it – so much so that, in his Budget speech, Finance Minister Arun Jaitley announced plans to adopt blockchain technology in various industries and sectors. At the same time, though, he also announced a virtual ban on digital currencies like Bitcoin. While BFSI is the most obvious beneficiary of this revolutionary technology, other sectors can also expect to benefit from it.

Blockchain can potentially disrupt the financial industry in many ways. Most banking systems are built around a centralised database, which is often vulnerable to attacks. A decentralised distributed ledger, protected by cryptography, eliminates the possibility of a cyber attack. Further, blockchain allows for cross-verification of the various counter-parties involved, significantly reducing the administrative costs of running KYCs. A blockchain system can eliminate intermediaries in the payments landscape, enabling higher security and lower payments-processing costs for banks. Also, moving trading platforms like NSE’s to a blockchain-based technology could streamline operations, fasten the settlement process, and create other efficiencies.

With the world’s second-largest land-mass, India’s farm sector has a 16% share of GDP. However, the country’s food supply chain is highly inefficient, owing in large part to information asymmetries. As a result, the majority of farmers (some 125 million in total) do not receive their fair share. With blockchain, farmers and others in the supply chain can access all the information they require, and even have fractional use or ownership over assets such as tractors. Blockchain can also be used to maintain land records. Andhra Pradesh, for one, is currently working on a blockchain-based land registry system. Eventually, this might reduce fraud, disputes, and errors, while streamlining the process of registration and title transfers.

The most fundamentally transformative application of blockchain is ‘smart contracts’, which automate payments and currency transfers without the need for an intermediary. This will have profound implications for the sharing economy in terms of removing power from centralised organisations, and giving rise to ‘prosumers’ (a consumer who is also a producer). Decentralising the energy market would make energy a resource that people can trade through a peer-to-peer platform. This would make micro-grids viable even in sparsely populated areas, of which India has many. Brooklyn Micro Grid, a peer-to-peer electricity system, demonstrates how distributed ledgers can enable the emerging ‘energy Internet’. On one side are homes that generate excess electricity using solar panels, and on the other, those that need to procure it. In the middle is a blockchain network managing transactions with almost no human interaction.

After BFSI, healthcare is possibly the biggest area of impact for the blockchain technology. Evidently, there are over 10,000 blockchain-based start-ups that are focused on solving healthcare issues. In the Indian healthcare sector, blockchain can potentially streamline patients’ medical records, make subsidy management more transparent, and automate claim adjudication and processing.

Real estate
Adopting the blockchain to maintain digital land-transaction records could bring much needed transparency to an otherwise opaque sector mired in fraud. If such transactions were to move to a blockchain platform, all of the parties involved – buyers, sellers, governments, banks, and brokers –would be able to easily authenticate titles and track each deal.

One of the key challenges around education is the ability to maintain an authentic repository of academic records. Prospective candidates for both university entry and jobs often overstate their qualifications and achievements, thus requiring the services of a third-party authenticator. Education loans tend to see some of the highest NPAs for the same reason. Blockchain can help maintain secure records that all stakeholders, including universities, students, employers and banks can access. This would improve placement outcomes, admission decisions, and potentially bring down NPAs in this key segment.

Many countries are embracing blockchain in the delivery of public services. Estonia, for instance, uses it to provide flexible e-Solutions to its citizens through i-Voting, and to create a hassle-free environment for business. It now takes just three minutes to start a company there. Dubai aims to become the first ‘blockchain government’ by 2020, delivering all government-to-citizen transactions through the platform. In addition to these administrative and record-keeping functions, a potentially huge application for blockchain is identity management. In India, the primary concern with Aadhaar is that this centralised database, which contains the demographic and biometric data of over a billion people, is an obvious ‘honeypot’ for hackers. A block-chain based Aadhaar would decentralise data management through multiple trusted nodes (such as state governments or other authorities), enabling validation while remaining impervious to attack.

Chit funds
Chit funds in India operate on a huge if unknown scale: just the scams that have taken place so far are valued at USD 10 billion. In many ways, chit funds are a parallel banking system, where people trust the larger community to hold and multiply their money without the intervention of banks. A blockchain-based system of authenticated, distributed trust could potentially turn the industry into an organised and reliable banking system.


Experimenting with Blockchain: A nine-step process

1. Appoint a blockchain evangeliser
2. Form a small cross-functional team
3. Brainstorm on the use case
4. Identify an external technology partner
5. Assess business impact, define performance metrics
6. Set up a governance mechanism
7. Design PoCs to understand measurability, ‘do-ability’, and impact
8. Execute PoCs
9. Scale or discard

More and more companies are exploring the use of blockchain as a business enabler. However, the technology is still at an early stage when it comes to business applications. Moreover, given the complex nature of the technology, and the limited availability of expert solutions, companies should consider the following criteria when deciding on a blockchain business use case: multiple participants share data; multiple parties take actions that need to be recorded; participants need to trust that the actions recorded are valid; removal of intermediaries can reduce cost and complexity; reducing delay has business benefits; and transactions created by different parties depend on each other.

Mahindra Trade Finance began looking at blockchain two years ago, and identified multiple use cases before short-listing supply chain finance for a Proof of Concept (PoC). The prototype was developed and tested for business applications within three months. The pilot has started yielding benefits: 29% cost reduction, 6x growth in market size, higher employee productivity, and improved transparency. The company is now working to scale the solution into an independent bill-discounting platform capable of providing services to non-Mahindra OEMs. Another use case within Mahindra is in tracking the car ownership journey – a KYC for vehicles – from sale, service, repair, recall, resale to scrap. The PoC, currently in works, aims to track the vehicle identification number (VIN) on a private blockchain with access provided to various participants, including customers, dealers, RTOs and auditors.

Questions and Answers

On blockchain’s ability to scale:
Centralised systems tend to act as shock absorbers, despite their challenges and bottlenecks. Decentralised networks, however, are vulnerable to shocks, which can significantly impact large-scale adoption. In the case of the Bitcoin, the largest blockchain, as more and more people trade the crypto currency, multiple participants are required to approve the transaction, creating a deep transaction backlog. Consequently, while Visa or MasterCard platform can process 50,000 transactions a second, the Bitcoin blockchain platform is limited to just eight transactions per second.

On owning blockchain’s protocol:
One of the biggest problems with blockchain is interoperability: everyone creates their own version of blockchain. This is evident mostly in the case of cryptocurrencies – India has Laxmicoin, while Venezuela created a petro-based coin. Many intermediaries tried owning the protocol, but the decentralised nature of the technology prevented mass adoption. A case in point is the recently created consortium of global financial institutions, R3, which tried but failed to create its own protocols.

Jaspreet Bindra This article is based on discussions with Jaspreet Bindra, Digital Transformation Expert, Advisor and Former CDO, Mahindra Group, at IMA India’s Annual CEO Strategy Roundtable in Udaipur in July 2018



Digital: Transformative Impact

The digital age is overwhelming in the scope of change it is engendering. That change is silent, and it is fast.