Will blockchain trigger the end of the corporation? Part 2
At the end of part one of this final blockchain series, we argued that the concept of the corporation is resilient and will survive in the future but not without some changes. Towards the end of part one we also teased you about the finale’s topic, which is the ways companies will need to adapt to start operating with a blockchain and smart contracts platform.
A significant yet necessary change will be the IT security mindset.
There are upsides to the legacy model of concentration of resources under single ownership. One of the advantages is the protection that custodial solutions provide. They might not always be impenetrable but convenient service to the user is provided. One such custodial solution is banks, where our money is safeguarded (which isn’t entirely true, nevertheless it is the general perception of depositors) and an infrastructure is provided to help us transact and use our funds in a safe and secure manner, either through bank branches, ATMs and through secure websites and apps.
As opposed to custodial solutions, the philosophy behind blockchain technology is very different. Blockchain technology aims to bring ownership and control of assets back into the hands of the rightful owners and promotes self-custodianship of one’s assets. With this philosophy in mind, the ways in which we implement IT security practices have to be more robust and closer to the cyber security best practices not only for the organization but also for the individual. This approach to the robustness of IT security would be opposed to what is probably currently the case for the majority and their chaotic password management solutions.
The accounting & treasury departments will also have to necessarily change processes related to management of funds over a blockchain platform. These changes will help the departments take back ownership of their assets as well as manage the assets that they may issue for example non-fungible tokens that are related to the specific community-based assets that they may foster and develop. For this, it is important to recap how blockchains work.
Blockchains work with addresses that represent the “public keys” in cryptographic terms. The public key is the component that is visible to all and is used as the destination of a payment. Addresses are currently outputs of hash functions that represent a pseudorandom set of characters and numbers that is very difficult to memorize and therefore impractical to use. Several blockchain platforms have made significant efforts to make these cryptographic addresses human-readable which will facilitate the ease of use. Such readable addresses will help with recognition of correct accounts and turn the usage of addresses more practical for users.
Addresses are organized into wallets and to execute a transaction within a wallet, a digital signature is required. Digital signatures require a private key or a derivative of a private key that should be secret. This private key or the derivative is needed for any transaction to be executed. Wallets expose the private keys in many different ways during the initial generation of the wallet. Therefore, there is a spectrum on which wallets sit normally, varying from cold to hot. Cold wallets generate private keys on dedicated hardware devices built specifically to have very limited connections to the hardware it may connect to, e.g. via USB, ensuring that the device is not taken over and therefore the private key never compromised. They are called cold because these wallets are highly protected not to be infected by other “hotter” hardware that may have software that aims to capture these keys either on the hardware itself or via hardware connected to the internet. On the opposite spectrum, hot wallets are wallets that generate a private key on an internet-connected device, and that key can be exposed during the small period when the key is visible to the user.
Owing to the diversity of wallets, accounting teams will need to navigate these different types of wallets. Hot wallets are more convenient for example to process regular payments or small quantities, while using cold wallets may be limited for higher value transactions and liquidity storage or for storing non-fungible tokens associated with loyalty programs.
Similarly, corporations might take particular interest in multi-signature wallets as they are very commonly used to sign-off transactions with more than one transaction approver. Digital multi-signatures will operate similarly to digital signatures with the difference being that multiple private keys will be required to validate a transaction.
Business processes will need to be adjusted to reflect these new technological elements in day-to-day activities therefore staff will need to be trained to work under new conditions, test environments will need to be set up to train people on mock blockchains designed for this specific purpose.
Not just the processes on transacting will change but other higher-level activities will also change within Finance departments. Currently, many activities dealt with by the Finance departments are related to reconciliation activities, for example - matching an invoice to a contract, verifying that the quantity invoiced matches what was agreed on the contract, submitting claims to suppliers when things are not correct, the back-and-forth of emails between departments and organizations, and so on.
Many of these activities will be simplified in the finance department as much of the manual journaling, consolidation, and reconciliation activities will become redundant. For example, if a company has a significant number of contractual agreements that trigger multiple transactions during a day or a week, having all these transactions and claims now managed through a series of smart contracts that can automatically trigger transactions on the blockchain, removes the need for the current reconciliation activities of matching invoice claims to the contractual trade activities as claims would be made towards an existing contract and immediately reconciled; we’re sure many staff in Finance departments can relate to the pain these activities can be.
Many of these matching and financial reconciliation exercises are removed because of the design of such sets of transactions through smart contracts. These smart contracts have the necessary data embedded in their design to trigger events when conditions are met where a settlement of payment is immediate, and confirmation is transparent and available for consultation. This provides the opportunity to focus on more higher-level activities such as assessing how funds are allocated to activities that generate higher returns, more value-adding activities for a finance department.
Nowadays organizations focus many processes on managing the hundreds or thousands of financial transactions that take place within an organization daily. Some processes execute the transactions while other processes monitor access to those transactions as well as protect the data that people from within the organization can see or consume. With the blockchain revolution, the focus will be on managing smart contracts.
Smart contracts are software-enabled automated transactions that are executed upon the realization of a specific condition. Given the prevalence that these smart contracts will have on ways of working, we believe much of the focus of corporations will be on managing the variety of smart contracts that will be happening across the different parts of the organization.
Assuming that smart contracts will soon be deterministic, meaning that during the conception of the contract one can anticipate the outcome of the contract with each different derivation path embedded within it, then there will be a demand for a software solution that summarizes the status of all the smart contracts associated to a set of wallet addresses.
So, once smart contracts gain a critical mass, one of the key applications that will be demanded by those who commonly transact on a blockchain platform is an application that can enable real-time tracking of transactions. This application would be able to monitor a set of addresses in real-time and the smart contracts scripts that are linking to these addresses and would provide a forward-looking liquidity view of the addresses to support treasury management and overall liquidity since the settlement is exponentially faster than in the legacy model.
But how do we know who are the participants in a transaction on a peer-to-peer network when all that is “understood” by the blockchain are addresses, how do we identify individuals and entities on the blockchain? What is an identity on a blockchain – an address? How do you know to whom the address belongs? You need an identity layer built on top of the blockchain. Will addresses only be human/entity related or will devices, machines also have addresses given the rise of IoT and automatically trigger transactions? These are all questions that are related to the next level tooling of the blockchain industry which relates to identity management.
Identity management can be rethought from our current legacy solutions. When tagged to a blockchain platform identity solutions can empower individual data protection. With cryptographically defined identity systems there are ways for individuals and organizations to concede the data they wish to share according to the party with whom they are sharing the data with. This is in complete contrast to the data monopolies that exist in the current centralization legacy model and from which they make handsome profits; therefore, one can anticipate many barriers being set up before this becomes reality.
Naturally, any identity solution will need to interact with some form of the legacy world and that will involve meeting the strict “Know Your Customer” & “Anti Money Laundering” requirements. Nevertheless, even here there is significant potential to drastically minimize the costs associated with storing and preserving the data of a corporation’s customer base that ensure that it meets these requirements.
But will identity be exclusively associated with entities and individuals? The Internet of Things provided us with a vision that our devices could come to life and deliver more value if they were connected to the internet and its data feed centralized for further analysis. With these new identity solutions that are level 2 solutions working on top of a blockchain platform, devices can have their blockchain address and therefore have an identity associated. The reason this is important is best explained through an example.
Imagine a snack dispenser machine (which when they first came out to market many saw as the first materialization of a smart contract way before blockchain) that is “aware” of the inventory it holds, and it forecasts an increase in demand at a busy street close to rush hour. This demand will trigger through its software the purchase of more goods through a smart contract of a blockchain platform that resides on its application. Immediately on the older generation, an amount from the blockchain payment address of the machine is reserved by the smart contract as escrow, and upon delivery of the goods that escrow is released to the destination account. These transactions across the multitude of different machines are all managed and supervised by a central team that owns the different dispenser machines through a monitoring application that is constantly querying the database provided by the blockchain and they can track the independent operations that these machines are now capable of performing with much less human intervention.
This simple example can be taken much further into the future where for example autonomous vehicles are a common means of transport and where each vehicle is capable of accepting payments through software to its address as well as paying for the electricity that it requires to top up its battery in-between shifts. There is a degree of financial autonomy that machines and devices can now have with the advent of smart contracts and blockchain technology that is simply not possible under today’s paradigm and will enable human resources to focus attention on higher-level activities such as management or innovation-focused activities.
Similar examples apply to any asset a company has that is rented out to a customer such as parking spaces, laundry machines, office space and equipment, configuring coupons and customer rewards as tokens that can be transacted on a blockchain, and many more. Ultimately there are new business models that are possible with this new underlying technology, in particular the introduction of services or goods associated with NFTs.
A lot is in store with regards to transformations in the corporate workspace and the development opportunities to deliver additional value to customers are multifold.
One of the reasons we dedicated a significant amount of time to discuss the different topics related to the blockchain is partly because we believe that this technology is so early in its ‘S’ curve that its current impact on society is still very minute yet with huge potential for the future. By consolidating our thoughts on this innovative topic at such an early stage we are primarily sharing this knowledge so that other organizations and individuals have a better understanding of what this upcoming industry can impact on our current status quo and spark interest to look deeper into the blockchain “rabbit hole”. Moreover, we also aimed to benchmark our thoughts and predictions, since much of what was mentioned, in particular in this last blog post, is related to predicting the different ways blockchain technology and the smart contract will affect our lives, to how the industry ends up evolving in the future.
We hope that we accomplished this cultivation of a newfound interest in the blockchain world and have sparked your interest by presenting the journey that we have been going through to better understand and navigate what could be a huge future opportunity.