Blockchain First

Do you remember the days when Nokia and RIM (That was the maker Blackberry, back in the days) ignored the advent of real Smartphones, in particular the first iPhone? This is evident in those famous last words by Mr. Lazaridis, the c0-CEO of RIM: “It’s OK — we’ll be fine”. History clearly shows us what happened next — Both RIM/Blackberry and Nokia have exited the handset business. But this post is not about how the mobile phone industry was disrupted, and how the innovator’s dilemma played out text book style. You can read about that in much more detail and accuracy in Clay Christensen’s work.

However, I would like to stick to the industry of handset makers as a comparison and analogy of what we see today with another technology that is still somewhat in its infancy and often ignored and even ridiculed by the incumbents. The technology I am talking about, you guessed it from the title 😀, is Blockchain. The Distributed Ledger Technology was first introduced as a technical foundation for Bitcoin (as the first app for Blockchain) and is now used by literally hundreds, if not thousands, of startups, projects and consortiums. I will not explain what a Blockchain is as there are fantastic explanations available in other places.

So what does this Blockchain thing have to do with mobile phones? On the surface, obviously, not a lot. Or to be precise, nothing. However, the journey that those two technologies went through (for Smartphones) and possibly will go through (for Blockchains) are remarkably similar in my opinion. Let me explain.

In the early 2000’s, almost seven years before the iPhone saw the light of the world, “web-enabling” technologies on cell phones became somewhat popular. One of them was WAP (Wireless Access Protocol) which allowed mobile users to access web content via their phones. It was neither pretty nor very usable, but it was a bridge from a very successful technology (the WWW) to mobile phones. Still, the vast majority of the web was built and meant for traditional browsers running on desktops, and in some cases, early adopters could access those apps and their content via their phones. It was a start. Shortly after step, the first “real” apps started to become available for a few handsets. For example, J2ME applications. This was an improvement to some extent, but still cumbersome to deploy and use. After those somewhat clumsy solutions to bring content and applications to the phone, the first real apps were introduced by Apple via the App Store in 2008. Developers started building dedicated, optimized apps for the iPhone AND had the distribution channel from Apple. The UI and the entire experience looked different than on a computer’s browser — they were optimized for screen size, battery life, limited internet access, touch screen functions and more. Still, those early mobile apps were afterthoughts to their big brothers: the browser / web apps.

Around 2009, a new design approach started to become popular: Mobile First. This meant that mobile applications were now developed from the ground up for smartphones. In many cases the mobile experience now came before developing or launching a traditional web application. This is where I want to make a comparison to the Blockchain world as we see it today. This is where I believe the development of Blockchain is heading over the coming years: To a Blockchain first approach.

Let’s use enterprise Blockchains and the enterprise software space as the example to elaborate. I am using that as a comparison because, first, this is my area of expertise, and second, the comparison is clearest and most advanced in this business.

The biggest consulting firms pour millions into the space in order to leverage the Distributed Ledger Technology to reduce inefficiencies within supply chains. Optimizing the Procure to Pay (P2P) process (how companies purchase goods, receive, and pay for goods and services) is one of the key areas of focus. The idea is to provide access to all participants of the P2P process (the buyers and their suppliers) through a shared ledger. In addition the rules of the process, the logic, and the checks are coded into Smart Contracts, which live on the chain as well. This substantially reduces the inefficiencies of today’s labor intensive processes for everyone involved.

Other examples of enterprise use of Blockchain include invoice financing, supply chain finance, factoring or invoice discounting. In essence, leveraging the Blockchain to be the record for financial assets that can be funded by third parties. Blockchain provides clear advantages over existing systems and reduces risk involved in those financing transactions. This means the cost of funding is lower and results in better financing offers.

What do those examples in the enterprise space have in common? The sources of the data for these use-cases are always third party systems. Sometimes one, often (and therefore worse) multiple systems. The data always originates outside of a Blockchain, is transferred onto the ledger and processed there. Often it is then copied into another external system later.

To illustrate, let’s look at the process of sending an invoice from a supplying company A to their customer B. There is a version of the invoice in company’s A billing system (the “receivable”) and a version of this invoice in the receiving customer’s accounting or ERP system (a “payable”). Often, a middleman service is used for the submission / transfer of that invoice (like a supplier network or an EDI / eInvoicing provider) which stores a representation of that invoice in their database. If this invoice then gets financed (“paid earlier for a fee”) by a financial institution, then a FOURTH representation of that document is stored in the bank or factoring company’s environment. Now we have up to four different versions of the same document, an invoice transaction. Each of those records then gets changed, adjusted, canceled etc independently from each other. Very often, all the data is simply “out of sync”. This creates huge inefficiencies to sort out, which increases the risks for funders. With that, costs are going up for all participants of this flow. This is why the current initiatives to use a single source of truth, a Blockchain, really seem to be good ideas. One location, one valid document, everyone has access to the same version. But even with a shared ledger that everyone points to, we still have the issue that the existing legacy systems hold their own copy in their own database. In addition to the invoice on the Blockchain these systems produce a multitude of copies again. Which one is used now as the “source of truth”? Using a Distributed Ledger for all parties to access a common source of truth for “shared processes” is already solving some of the problems but everyone still keeps local records and pushes/pulls and synchronizes their local state with the Blockchain again.

The Blockchain FIRST approach will soon become a reality in many business processes. Applications will be designed where all the business logic and data storage primarily happens on a Blockchain. All other systems and participants will have access to this logic and data and mirror the necessary objects back into their systems. For example, an accounting system that has all of its accounts and business logic on a chain. When a supplier generates an invoice it is created on the chain FIRST and the buying organization reads the that invoice from the Blockchain to use it for further processing in their own ERP system. All involved applications agree that only updates on the Blockchain are valid for further processing (like financing the invoice). With that, there is no receivable or payable anymore. The Receivable and the Payable become the same transaction. There is simply a unique invoice living on the Blockchain, visible and accessible by all authorized parties. To give another example of a common and conflict-laden business process, a purchase order created by one system and sent to a supplier where it is represented as a sales order become the same: simply an order, represented as a Smart Contract, where all business logic is embedded that the parties agreed on.

This is where I see this striking similarity to the mobile world. It started as a “let’s do mobile in addition to desktop”, which is comparable with “let’s use a Blockchain as an immutable backup”. We are right now moving into the Blockchain first world, that again very is comparable to the Smartphone world, which now treats the new technology and paradigm as a primary consideration instead of a secondary design aspect.

Many apps on Smartphone now follow a “Mobile Only” approach (Snapchat, N26, Tinder and others), due to the ease of use, but also because of the superior capabilities of phones (sensors, location tracking, camera, mobility etc.).

Let’s guess when we will see a “Blockchain Only” movement!