Blockchain: What It Is, How It Works, Why It Matters

Digital technologies have streamlined many business interactions, but numerous information-heavy processes still require exchanging private data between entities. Unfortunately, these exchanges often rely on outdated, insecure and error-prone methods. Many organizations attempt to address these issues by limiting transactions, implementing manual controls or involving intermediaries. However, these strategies add time, cost and complexity, while limiting business opportunities.

Blockchain, a fundamental technology of Web3, offers a potential solution. Initially designed for peer-to-peer payments, blockchain has evolved to facilitate secure information exchange. Despite its reputation for transparency over privacy, advancements such as Layer 2 zero-knowledge proofs are emerging to add privacy features, though these are not yet widely adopted. Blockchain’s main function remains facilitating payments, and while newer assets like non-fungible tokens (NFTs) have expanded its scope, it still lags behind traditional platforms in versatility.

Blockchain is a digital ledger comprising cryptographically signed, irreversible blocks of records shared among participants in a peer-to-peer network. Each block is time-stamped and linked to previous ones, allowing anyone with access rights to trace transactions or changes. One defining feature of blockchain is its transparency — every transaction is visible to all participants. While this is beneficial for some use cases, it can be a drawback for others. In response, newer blockchain platforms have developed privacy mechanisms, though these are still evolving and not yet common.

Blockchain’s key value lies in enabling secure transactions in environments where trust (data security) is difficult or costly to establish. It allows individuals and organizations to transact safely without intermediaries such as banks, insurance companies or logistics providers. Additionally, blockchain supports “smart contracts,” which automate business processes by encoding rules for transactions and asset management into the blockchain system.

Gartner identifies five key characteristics of a complete blockchain solution: distribution, encryption, immutability, tokenization and decentralization. Notably, consensus algorithms, which drive decentralized decision making, are essential to true blockchain platforms but are not used in all cases.

Many organizations opt for “blockchain-inspired” solutions, which incorporate some but not all of these features. This approach is often sufficient for specific use cases and can be simpler to implement. In fact, most enterprise use cases don’t require full blockchain functionality and are better off without the added complexity of true blockchain platforms. Over time, as the technology matures, organizations may evolve these solutions into more complete blockchain systems with decentralized applications (dapps) to further automate business processes.

Over the past seven years, most enterprise blockchain projects have failed, and customers and partners alike have lost faith in blockchain technology. In many cases, these blockchain projects failed to deliver value because the use cases did not require blockchain technology in the first place. Therefore, it is key for CIOs and CTOs to identify core use cases where blockchain can uniquely add value to their organizations.

Blockchain use cases typically fall into a combination of four key categories:

These initiatives rely on a blockchain foundation to achieve decentralization of business model and/or technology functions. They usually depend on all five blockchain elements.

These initiatives establish new markets that facilitate the creation (or representation) and trading of new tokenized digital assets using smart contracts.

These initiatives attempt to improve efficiencies in existing business processes within a company or at an industry level. They tend to preserve the current business models and the actors within. They can be led by a dominant player in an ecosystem or through informal or formal alliances (such as consortia or association).

These initiatives aim to ensure that records cannot be corrupted and can be audited on demand. Government entities are well-suited for these types of initiatives. They require distribution, encryption and immutability, but not necessarily decentralization or tokenization.

These include trades in financial transactions, insurance claims, securities, capital markets, trade finance, supply chain management, logistics and transportation, healthcare, and public services and records. As a result, industries as far reaching as finance, insurance, manufacturing, real estate, healthcare, government and others can realize value from leveraging blockchain technology.

Based on Gartner’s Case-Based Research, blockchain solutions are already delivering business value in supply chain tracking and tracing and in data exchange marketplaces (two examples of efficiency and digital asset market use cases).

Supply chains are characterized by a lack of trust and data sharing, which creates operational inefficiencies and results in product and revenue loss. They also lack end-to-end visibility, which inhibits transparency and compliance. Blockchain technology addresses these challenges by providing:

• Data immutability for the sharing of verified data among stakeholders

• Encryption for secure data sharing in a trustless network

• A ledger for tracking assets and transactions end to end

• A system of record for automatic data processing

• A distributed system for verifying transactions without a centralized authority

For example, the World Federation of Hemophilia (WFH), an NGO, partners with pharmaceutical companies to donate medicines to developing countries. In May 2021, WFH partnered with the British Standards Institution and Trace Labs to pilot a track-and-trace blockchain solution in India to address concerns around product diversion and product loss in the supply chain.

The implementation used Trace Labs’ AidTrust data management solution powered by OriginTrail’s Decentralized Knowledge Graph. Donated products are equipped with QR codes, which are scanned at the distribution center and at the receiving hospital. This supply chain transparency:

• Enables products to be authenticated as real (and not counterfeit)

• Provides visibility on medicine stock levels

• Pinpoints diversion or waste issues (such as expired products)

Currently used at 90 distribution centers across India, AidTrust has tracked 4 million medical units and reduced product loss by 100%.