Blockchain – A New Small Business Paradigm

Blockchain, a distributed ledger technology, is a small business process game changer.

It will shorten and simplify business processes for organizations of all sizes while reducing costs and losses and minimize exception processing.

While the press emphasizes the cryptocurrency component, its biggest impacts will be in the payments arena and the use of smart contracts. Small business owners and executives need to understand the new processes and their impacts to legal contracts, fiduciary commitments, privacy, security, compliance and workflow before committing to using any blockchain-based offering.   

Blockchain was popularized by Bitcoin in 2008 where it was used as the backbone distributed database to the public cryptocurrency exchange.

As defined by Blockchain Technologies, a distributed ledger is a consensus of replicated, shared, and synchronized digital data geographically spread across multiple sites, countries, and/or institutions. The Bitcoin approach uses a peer-to-peer method where multiple individuals, called miners, offer their computing power to verify and record the cybercurrency transactions into the blockchain.

The hype in blockchain picked up in 2016 when it was touted as “the answer” for all sorts of use cases because the shared ledger is encrypted but transparent to multiple organizations and the data cannot be erased. 

Not All Blockchains Are Alike

Blockchains come in a multiple of flavors: public vs. private; platform vs. software; and permissioned vs. permissionless. (See chart below, which shows some of the players in each category.)

There are advantages and disadvantages for each type.

Source: D+H and RFG

Large enterprises that want to build their own solutions will acquire the software and develop their special offerings from there. All others will want to work with a fully functional platform such as those offered by Ethereum or Ripple.

It is important to understand the differences between permissioned and permissionless practices.

A permissionless environment allows anyone to contribute data to the ledger with all participants possessing an identical copy of the ledger. In this environment, there is no single owner of the ledger, which makes it more suitable for censorship- and/or regulatory-resistant uses.

Conversely, a permissioned environment allows for distributed identical copies of a ledger, but only to a limited set of trusted participants. The network may have one or more owners, and permissions may be limited to the parties involved in each specific transaction.

This approach is better suited for applications requiring simplicity, speed, and transparency and where the participants are comfortable vouching for parties executing the transaction.

As the above chart shows, the permissionless (open) method is slow in its ability to complete and record a transaction while the permissioned (closed) method is far quicker, requires significantly less compute power, and is better suited to a business environment.

Use Cases

The primary use cases for blockchains currently under consideration are crypto or virtual currencies, cross-border payments, clearing and settlement, letters of credit, syndication of loans, invoice financing, smart contracts and P2P payments.

The final word is not in from the various regulatory agencies around the world on the use cases but their initial reports and statements are neutral to negative on virtual currencies and neutral to positive on contracts and payments. Regulators are worried about the chain of custody when it comes to virtual currencies and until they can solve that problem, don’t expect their opinions to change.

Note that Bitcoins and other cryptocurrencies are open to all that want to partake and there is no oversight as to what the funds will be used for. Silk Road was an online black market, known as the eBay of drugs by its users. The U.S. government shut it down.

However, the other use cases are intended to improve existing business processes for various business transactions.

In all cases these are agreements between known parties (in many cases a bank or custodian is the party of record acting on behalf of and attesting to the validity and worthiness of its client).

Next page- One practical example of a payments processing using blockchain.