Most use cases for blockchains have been about incentivizing participation i.e. rewards. You see this in Bitcoin's Proof-of-Work (PoW) consensus mechanism and in staking systems like in EOS, Tezos and Tron. Nodes contribute resources to help secure and validate transactions to produce blocks. In mainstream business applications this is more or less not applicable due to the nature of the transactions. Transactions on the blockchain were meant to be open to the public and transparent in a decentralized network. Most businesses cannot operate that way, especially if it involves confidential data. A big question has always been about how the blockchain can be implemented with or without economic incentive in enterprise business operations.

Big Business

Large enterprise networks are secured by a domain or security provider that authenticates users. This is a requirement since businesses began using the open Internet for LAN/WAN integration of data delivery. It has allowed corporate networks to share information securely and privately as well. Company IT admins can configure secure VPN connections between offices or implement secure tunneling protocols using a PKI (Public Key Infrastructure). This has been supported by a team to maintain the infrastructure with an administrator who has complete control of the network. Users can be delegated with special privileges to perform operations like backup, server configuration and application deployment.

This network architecture of sharing information is based on older client/server technology, which is commonly implemented in a domain for Windows systems or with a security provider on other systems. SSL (Secure Sockets Layer) with digital certificates is used to authenticate users and verify the validity of a server in the network. These networks are also private and permissioned. An authentication server permits only members of the network or those with user accounts.  It requires the trust of a central admin who controls everything from passwords to advanced settings. This is in contrast to a blockchain network, which is public and open to everyone.

The Challenges

Blockchains used for Bitcoin, Ethereum and other digital assets are public. They are also trustless and permissionless, meaning they don't require a membership to join. They use public key cryptography with a digital wallet that holds a private key to verify a user's identity. The user owns the private key which allows them to use the blockchain to send and receive cryptocurrency. Transactions are validated by nodes on the network and in return for their part receive a reward. This creates a different environment from enterprise networks.

One of the main challenges is privacy of information. Since the blockchain is public it is transparent to all. Anyone can view transactions created on the blockchain using an explorer application. Unless there is a privacy layer, there is plenty of data exposure and for many businesses that deal with confidential financial information that can be a problem. Banks are one institution that cannot reveal data publicly. Imagine your bank posting your full account balance details on the blockchain for everyone to see which violates the customer's privacy. The blockchain is not anonymous, but rather pseudonymous when it comes to identity. An account can still be traced to a customer.

Scaling is a known issue on blockchains. Bitcoin at most can push for 5-7 TPS (Transactions Per Second) and Ethereum can process between 15-30 TPS. That is not even close to the capabilities of credit card companies like VISA. Scalability is an issue with blockchains due to the network design. When you have more decentralization, like on public blockchains, there are more nodes on the network. In a centralized system, it only takes one node to validate a transaction. There are many nodes on a blockchain, requiring more time to reach a consensus to validate transactions. That can be detrimental to business operations because time is crucial. Bitcoin takes 10 minutes to produce a block of transactions through the process of mining. Normal enterprise networks need to quickly process large volumes of data used in daily banking, finance and payment transactions.

Incentives are also not something that businesses give for processing their transactions. They have private networks for a reason and that is already a viable solution that does not require a blockchain. On blockchains, the incentive is a form of payment in the cryptocurrency's coin or token as a reward for helping to produce blocks. The problem with this is that from a business perspective it increases costs if processing transactions on the network requires a reward for validation. The enterprise is concerned with writing data to persistent storage that are then accessed on the backend by partners for gathering data analytics and insights. Using tokens on enterprise networks also adds more overhead to data processing. Businesses are doing fine without using cryptocurrency.

Private Blockchains

The proposed solution for implementing blockchains in enterprise business is through DLT (Distributed Ledger Technology). It is basically a distributed database, but implements blockchain features like cryptographic security, immutability and transparency. It doesn't even have to be called a blockchain, in the context of cryptocurrency. This is because the network doesn't require a token to be used. Implementing a cryptocurrency or token can actually complicate matters (e.g. regulatory compliance, etc.). This is where things get contentious because now the question is why even use a blockchain if there is no token and incentive?

It is about providing data verification among businesses where fraud and accounting are serious issues. A private blockchain provides a layer of verification in a permissioned and trusted network to provide transparency to business consortiums that are prone to inconsistencies. These are usually large operations, where tracking information can sometimes become difficult. The consortium consists of business partners who don't need to incentivize each other or anyone to process transactions. Each partner is a member of the consortium, and is considered a "peer" who has equal access to the network. They cooperate in a Coordinated Game Theory approach in which the members work together for the purpose of the greater good of the network.  

The blockchain records all transactions among the members. The members cannot manipulate data, because it can be detected and prevented by other members. This provides a way to prevent any member from cheating their business partners, since the data is transparent. Once the data is recorded on the blockchain ledger, it becomes immutable by applying cryptographic hash functions, so the data cannot easily be tampered with. This encourages a fair and level playing field for the members to engage in business. No cryptocurrency is needed for this use case, as the members are not mining or staking. Incentives are not the requirement for private blockchains. Instead it is about honesty and trust.

Synopsis

The use case for enterprise blockchains does not require cryptocurrency or a form of tokenization. Instead it is about establishing an honest and trusted verification layer for transactions among business partners in a consortium. The members coordinate to achieve an equilibria in business operations, where no member can exploit another member. If a business is not being fair to other partners, the blockchain can be used for provability to provide empirical evidence.

The other benefits of enterprise blockchains include:

  • Scalability - Can scale for large enterprise networks since the consensus among peers is deterministic and not probabilistic. The consortium validates the truth based on the data, and are not competing with other members (e.g. mining, staking). The finality of transactions and production of blocks can be achieved much faster and more efficiently.
  • Privacy - Business data does not have to be exposed like on a public blockchain. When the transactions require privacy due to regulations, it must not be exposed to the public. A private blockchain network can be made available only to members of the consortium, thus the data remains confidential.
  • Security - Since the blockchain used for the enterprise is private, it is more secure. It limits access through an authentication system that verifies members by digital certificates and security tokens. Only members that are authenticated by a membership provider can access the blockchain.

Enterprise blockchains can be used for specific business problems. The consortium must also find the value proposition for using DLT. It is not an absolute solution, so its feasibility among consortium members must be explored. There is still the possibility of a dishonest member, so the consortium must develop their own protocols regarding how to govern the system. It can be customized based on the business procedures. If costs can be reduced with a better method of verification in business processes like product authenticity and inventory, an enterprise blockchain can be an ideal solution.

There are different types of implementations that can even use zero knowledge proofs to hide the actual data among members, but still provide validation. What is important before implementing a blockchain is to weigh the risk and benefits, just like in any other business project. Treat it the same way as in traditional business operations with the purpose of exploring how it can make things better based on the benefits.