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Blockchain, when and why to use it in business processes

Blockchain

Distributed Ledger Technology (DLT), of which the Blockchain protocol is part, represents one of the technological scenarios that has among the greatest and most interesting potential and is considered “disruptive” by many, as it can revolutionize ecosystems, services, processes, transactions, and modes of relationship. But let’s see why.

It is an innovative technology based on the concept of distributed consensus in validating the exchange and negotiation of transactions and on an unchangeable register of these transactions, thanks to the use of mathematical functions, advanced cryptographic algorithms, and some applications linked to game theory.

It is the social and economic context that is spontaneously moving towards more innovative and equal business models, exploiting the technology of distributed registers that enables disintermediation in financial systems.

Blockchain can impact all transactions related to assets, information, and documents by overhauling the concepts of trust and ownership compared to a traditional transaction where validation is managed by a central third party entity or system that is considered trustworthy. The distributed certification and trust mechanism inherent in blockchain can take place thanks to the following three main features:

It must be emphasized, however, that blockchain is a young technology, on which concrete and valuable projects are being launched. There are also ongoing experiments, research, and especially improvements in terms of speed and scalability capabilities, level of protection of personal data, and cost of transactions in order to mitigate some of its limitations.

 

 

Blockchain: How it works and its value

But how, in concrete terms, does blockchain work? Each node on the network is connected to a subject, and the process of consensus and validation of a transaction provides, in a “pure” blockchain, an equality of power and influence by the participating nodes.

Transactions on the network are initiated by users who use their own private signing key to authenticate transactions and who know the recipient’s address; transaction data is stored in tightly linked blocks of information, hence the name blockchain. Each block contains the hash reference of the previous block, to ensure stable correlation between blocks. Once each node recognizes the transaction as valid, it proposes the block to the rest of the network and the consensus algorithm adopted allows to decide by majority which block will be added to the queue of the distributed electronic ledger.

A block of information created and recorded on the chain cannot be modified. The requirements to ensure that it cannot be modified are guaranteed by the hashing linkage between the blocks and by the creation time stamps of the blocks themselves.

Generally, a blockchain integrates a digital token into the transaction as a medium or means of exchange that transfers a right from a sender to one or more recipients, transferred based on cryptographic evidence. Tokens can be versatile in the sense that they can digitally represent many types of transferred assets, from cryptocurrencies, fiat currencies, and financial securities to physical assets such as real estate, vehicles, and artwork, just to name a few.

Thus, the widespread trustworthiness of a transaction through the blockchain means that it is possible to guarantee:

 

The various blockchain scenarios: Public or private, permissionless or permissioned

A blockchain can be structured from two different paradigms: we can have public (permissionless) or private (permissioned) blockchains. What differentiates the two paradigms is the different model of responsibility and control.

The distinction is based on access permissions on who can read and/or send transactions to a blockchain and participate in the validation process. In a public blockchain, anyone can access and take part in transactions, while in a private blockchain, only selected parties can access and make changes.

Private or permissioned blockchain networks are often used by industry consortia that, due to privacy issues, regulatory concerns, or system performance, restrict access to the blockchain to only those organizations that have been admitted to the network. Permissioned blockchains more easily can develop security and authentication capabilities, which are critical elements of managing digital assets on a distributed network.

 

Electronic integrity and date certainty

By transferring the data of a service, a process, a transaction, or the hash of a document on a blockchain, it is possible to guarantee integrity and a certain date to the data set or document.

Article 8-ter paragraph 1 of Decree-Law no. 135/2018, the so-called Simplification Decree 2019, which was converted into Law no. 12 of February 11, 2019, defined “distributed ledger-based technologies” as information technologies and protocols that use a shared, distributed, replicable, simultaneously accessible, architecturally decentralized ledger on a cryptographic basis, so as to enable the recording, validation, updating, and storage of both plain text and further cryptographically protected data verifiable by each participant, that cannot be altered or modified.

In addition, Paragraph 3 established that the storage of a computer document through the use of distributed ledger-based technologies produces the legal effects of electronic time validation referred to in Article 41 of EU Regulation No. 910/2014 (so-called eIDAS).

For example, a typical case of concrete and implementable application is the use of blockchain for the hashes of the records of a database, since computer records of databases, in a business context, must legally guarantee that they are authentic and that they have not been modified.

Uses and applications of blockchain

The feature of intrinsic disintermediation and crystallization of traceability of the transferred asset are among the most innovative requirements of blockchain technology, which has and will have increasing impacts on the evolution of social and organizational models, as well as positive impacts in terms of technological process innovation. Service providers can interface with the blockchain to offer advanced functionality to users, for example API integrations services.

The financial sector currently has the largest number of blockchain applications, as security and confidentiality of transactions are key requirements.

Blockchain makes it possible to track when and by whom a given change was made, which is why blockchain technology is spreading in all scenarios where it is required to ensure traceability and authenticity for a product or service, such as the agri-food supply chain.

In addition, another widespread application is that of notarization or crystallization of data on blockchain, which ensures the association of a certain date.

Another application on which various projects and concrete initiatives have focused is that of smart contracts, i.e. the automatic activation, based on distributed ledger software technologies, of contracts between private individuals upon the occurrence of certain events or conditions predefined by two or more parties.

Smart contracts meet the requirement of a written form after computer identification of the parties involved, through a process that has the requirements established by the Agency for Digital Italy with the appropriate Guidelines, which to date, however, have not yet been issued, an aspect that has blocked the production of these initiatives.

In conclusion, many sectors have started initiatives and projects in order to exploit the potential of blockchain and its open source features. The growth of these initiatives will be increasingly relevant, but it is important to arrive at the definition and sharing of a cross-industry standard of distributed ledgers.

For a more large-scale enterprise adoption, this will require a definition of further regulatory and legal requirements in order to ensure the accountability of every single entity (node) in the network.

 

The main sectors of application

The National Strategic Plan of the Ministry of Economic Development has identified  several sectors that will have the greatest benefits from the adoption and application of Blockchain/DLT technologies. They are:

In a press release on February 1, 2018, the European Commission inaugurated the EU Observatory and Forum on Blockchain with the support of the European Parliament, with the aim of highlighting the most important developments in this technology, promoting the European players involved, and strengthening European engagement with the various stakeholders involved in the blockchain industry.

In the statement, the European Commission said:

Blockchain technologies, which store blocks of information that are distributed across the network, are seen as a major breakthrough, as they bring about high levels of traceability and security in economic transactions online. They are expected to impact digital services and transform business models in a wide range of areas, such as healthcare, insurance, finance, energy, logistics, intellectual property rights management or government services.

Technologies such as blockchain can help us reduce costs while enhancing trust, traceability, and security. They present enormous potential in making social and economic transactions that are carried out online more secure, as they offer protection against possible attacks and eliminate the need for intermediaries.

 

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