Scalability, Security or Ownership: A Trilemma
Last week we talked about the potential of blockchain technology in modern extensive supply chains. This week we want to address in more detail the issues when establishing the necessary level of trusted data exchange and what challenges come with that. Have a secure chain without being blocked.
Trusted data exchange at speed
How can you start understanding blockchain in your supply chain and how could it fit in, to not only help secure the process but increase verification speed and put a more detailed trust into your supply chain transactions?
There are a variety of different drivers, and one of them is how can you move faster. And at the center of moving quickly for a business is trust. Historically, intermediaries used to arbitrate and provide that level of trust. But those tend to slow the process and increase its cost.
Some are driven by the increase in data that needs to be shared. For efficiency and security as well as privacy and compliance you need a trusted data exchange to facilitate this. Not necessarily all data all the time. But at least the proof that you have the data, and then selectively releasing the data that’s needed. This might be a first step onto these blockchain projects, and possibly one of the reasons for the 50% of polling audience implementing a blockchain project.
Compliance for data exchange
Blockchain projects tend to be massive. They often involve many parties. Coordinating an internal IT project, adding all your trading partners and regulators, which is the common trend for early blockchain projects. It is very much regulation-driven. It becomes rather complex. But to prove that the data exists and to prove that it existed at a particular point in time and hasn’t been changed, is a significant driver.
Integrity needs to be established at any level. Be it every financial transaction that the FDC wants to see from a financial services perspective to every temperature sensor in a supply chain from a pharmaceutical perspective that the FDA wants to see. But knowing that the timestamp and the data hasn’t been changed and at any level of detail. Be it some data, an entire database or just that one temperature sensor on an IoT device saying the blood for a transfusion was stored below freezing or not.
This needs to happen in a way that isn’t going to expose the company who is now owning more of the customer experience and certainly the intellectual property, as seen in the megatrends, but it has to be private and secure. So, a selective way to do that that stays compliant with privacy laws across various geographies.
Leveraging Blockchain technology for trusted data exchange
Blockchain holds a tremendous promise. The distributed ledger technology has been around for over 10 years and within the last 2 years became a household word. Even in pop culture a show like HBO’s Silicon Valley mocks it and says that the most challenging question for a parent is how to explain a blockchain to your children. It’s one of those things where it’s a household word now, but how do you actually use it?
You take advantage of the big promises of the blockchain without necessarily getting any of the disadvantages. An immutable record of ownership is what you want to establish to definitively prove who was first. For the first time ever, now you can have digital assets with originality.
Instead of trusting institutions and other forms of social trust mechanisms, they have shifted towards mathematics to create trust in numbers and encrypt data for extra security. This reduces friction. Fewer intermediaries allows for an exchange of information and transaction settlement in contemporaneous ways that reduce trust errors and lets us know if data has been manipulated or not. All of that together holds the promise of increased velocity and performing business at the speed of trust. Although interest is high, it is still just at the beginning of the adoption phase.
The scalability trilemma
How do you get it into an implementation project? How do you get started without taking on a massive project that would require an industry consortium?
To properly utilize blockchain technology you should observe and test certain tradeoffs. Not understanding tradeoffs is part of the reason that these projects have taken so long to come to fruition. The scalability trilemma that the founder of Ethereum, cryptocurrency had coined is saying you can’t have it all. You can either scale the number of transactions and data you’re sending through into blockchain blocks or you can have trust and security. The third part of the trilemma here is this kind of decentralization. This is a degree of diversification of ownership. You end up seeing trusted parties coming into a permission-less chain. You’ll hear about consortium blockchains for a particular industry, maybe driven by regulation. But it’s a limited number of players that come together. This increases the risk of pulling in the degree of diversification which defensibility against attacks.
Scalability and security are the most contradictory leading to direct tradeoffs. If you go private, you can get higher transaction throughput, at a lower level of trust. And what happens when one of your trading partners is acquired by another one, for example.
For a public blockchain, the throughput is low, but the level of trust is extremely high. You see a variety of different tradeoffs, but how do you overcome them has been a debate of many blockchain consortiums in industry.
The reality is the scalability of transactions per second, it’s not going away. The idea of having an immutable distributed ledger is something that people want to have. Without sacrificing scalability. But then the cost of implementing, supporting the project and the cost if you try to anchor something on a blockchain is high. The reality is that it will cost about 50 cents to a dollar or more to anchor a transaction on a blockchain. If you think about IoT sensors and the amount of information they’re collecting, it simply becomes cost-prohibitive to use traditional approaches to anchor data onto public blockchains. The challenge: you can scale, or you can have security and interoperability. So, write to many blockchains to counteract that. When working with an industry consortium you have to come to an agreement on consensus protocols and more to further muddy the waters.
Come back next week to find out how to address the scalability trilemma and effectively leverage blockchain technology!
Read the entire whitepaper “The Blockchain-Empowered Supply Chain” here.
If you are looking for a solution check out our partner Acsis!