Why Companies are Cautious about Blockchain

On November 22 last year, Axis Bank became the first financial institution in India to launch instant international payment services using Ripple’s enterprise blockchain solution (http://bit.ly/2Ad0nRs). Prior to that, on November 10, Hewlett Packard Enterprise Company introduced blockchain-as-a-service that can help companies “deploy blockchain solutions quickly and easily (http://bit.ly/2iUSyWA)”. And earlier in the same month, Primechain Technologies Pvt. Ltd, which operates a blockchain community of banks called BankChain, announced that the State Bank of India is working towards a “safer, more secure banking system in India through its implementation of blockchain solutions with BankChain and Intel”.

These are just a few examples in the growing pile of reports about the potential of blockchain--the distributed ledger technology behind crypto-currencies such as Bitcoin. Now, increasingly, blockchain is finding traction among various industries. Research firm Gartner Inc. estimates that blockchain can generate business value worth $176 billion by the year 2025.

Among the big technology companies that have thrown their weight around blockchain are International Business Machines Corp. (IBM), Intel Corp., Microsoft Corp. and Google Inc. (through investments in blockchain).

In addition, there are specialist companies trying to capitalize on the opportunities emerging out of blockchain. “We realised that different industries—financial, insurance, supply chain and others—wanted to try their hand at blockchain,” said Akash Gaurav, founder and CEO of one such company in India, Auxesis Services and Technologies Pvt. Ltd, in a recent interview.

While the buzz around blockchain is high, according to Gaurav, the technology is still evolving—it is in its second version currently, with development going on for what is called blockchain 3.0—and there are challenges related to its adoption.

“It is true that there are a lot of PoCs (proofs of concept) in different industries, but nothing is moving beyond that stage into production,” he said. The problems, in his view, are industry-specific. “For instance, Indian banks tried blockchain in trade finance in 2016 and then people never talked about it. There were challenges at the production level in terms of maintaining privacy and confidentiality of data,” he averred.

“Blockchain is not as evolved as other mature technologies such as the Java programming language or the Oracle database,” he added. And while mature technologies can be easily deployed in any industry, it is a different situation with blockchain, as it “involves many protocols related to specific industries”.

At the heart of the issue is that blockchain was designed with a peer-to-peer, crypto-currency environment in mind. “Now, what we are doing is taking that blockchain infrastructure and putting business logic on top of it so that it can be used in multiple industries,” Gaurav explained.

The challenges of implementing blockchain for enterprises, according to Gaurav, include companies’ specific requirements, different data standards and the nascent nature of the technology.

For instance, while the banks want to have the benefits of transparency, security and audit trail provided by blockchain, they “do not want their competitors to see their data” (something that blockchain allows in its current or basic form). “So they want to control certain things,” he said.

To address this, Auxesis, on its part, has created a basic blockchain fabric it calls “Auxledger”. “For each industry, we study its regulatory needs, its business processes and its data standards to build a (software) plug-in for that industry,” he added. Using that plug-in, that particular industry can more smoothly implement blockchain. Thus far, Auxesis has developed two plug-ins: one for identity management for the government sector and another for the financial industry.

A blockchain network must follow certain protocols--for instance, the consensus protocol by which a certain proportion of participants in the whole blockchain must agree to the modifications made to the contracts (called smart contracts, as they execute automatically) for those modifications to become functional (http://bit.ly/2im8wXZ).

“For example, in the Ethereum smart contracts, a contract must be executed by every party in the network. This vision was against having private contracts. But in a banking scenario, you have to have private contracts,” said Gaurav. The idea of having private contracts in a blockchain is also referred to as a “permissioned blockchain”. In January 2017, for instance, Bajaj Electricals put in place such a permissioned blockchain to pay its suppliers (http://bit.ly/2mSc0DD).

Gaurav said that there are blockchain frameworks such as R3 Corda that can take care of private or confidential data so that all the transactions of the parties participating in a private blockchain are not visible to each other (www.corda.net).

The growing capabilities of blockchain and the push from companies such as Auxesis and Cateina Technologies (which worked on implementing the Bajaj blockchain) are making organisations open up to experimenting with blockchain.

Talking about his current projects, Gaurav said that Auxesis has partnered with two state governments for implementing the Auxledger identity management software that is “layered on Aadhaar” (the 12-digit unique identity number issued by the Indian government). “We have onboarded 53 million identities on our platform. Using blockchain, the identity data of people can be made even more secure so that others cannot easily access it. This can be done through layered access rights and encryption. The identity management plug-in can also update any changes made to Aadhaar,” he said.

Further, as a pilot, Auxesis is working on a direct benefit programme for one of the two state governments. “It is an end-to-end project which involves writing business logic, capturing data and making the data immutable, sending out communication alerts, etc.,” revealed Gaurav, while declining to name the state.

Another PoC developed by Auxesis for a pharma company involved the use of humidity and temperature sensors on transport vehicles carrying heat-sensitive medicines that could be spoiled en route from the pharma firm’s factory to various retail destinations. “To detect this, we used the sensors connected to a microcontroller, which is a part of the blockchain network. So if the temperature varies from the required range by a certain amount for, say, more than 10 minutes, a smart contract gets executed in the blockchain and the involved parties to the contract get notified,” he explained. The benefit of using blockchain combined with sensors (which would typically be part of an Internet of Things network maintained by another company) is that if the goods are spoiled, it is easy to find out who is responsible and settle the claim with the party that should bear the cost of spoilage—be it an insurance company, the logistics firm, or a distributor of the pharma company.

Not everyone is convinced that blockchain will revolutionize businesses anytime soon. In an article titled ‘The truth about blockchain’, Harvard Business School professors Marco Iansiti and Karim Lakhani noted, “Although we share the enthusiasm for its potential, we worry about the hype. It’s not just security issues (such as the 2014 collapse of one bitcoin exchange and the more recent hacks of others) that concern us. Our experience studying technological innovation tells us that if there’s to be a blockchain revolution, many barriers—technological, governance, organizational, and even societal—will have to fall. It would be a mistake to rush headlong into blockchain innovation without understanding how it is likely to take hold.” (http://bit.ly/2hqo3FU)

The key question regarding wider and faster adoption of blockchain, according to Gaurav, is for someone in the industry to take the initiative and convince other companies concerned to join the network.

(Note: This post first appeared as an article on www.livemint.com.)