Expert Advice for Medium and Midsize Businesses

What is blockchain? A Simple Explanation for SMBs

Guest Author

By Steve Cox, Group Vice President, ERP and EPM Cloud Business Group, Oracle

Last week, I published a primer about blockchain for finance professionals, and the response has exceeded my expectations. Dozens of compliments began rolling in, and the story was even republished in Forbes.

I think what resonated with readers is the simplicity of the explanation. Everyone is talking about blockchain, but few seem to understand what it is. Most of the primers I’ve read explain it in technical terms, with little understanding of the business implications.

This goes against the wisdom I’ve learned over years of working with small and medium businesses: Business goals first, technology second. Any emerging technology—from blockchain to AI to robotic process automation—is merely an enabler. The first thing any SMB leader must decide is, “What are my business goals?” From there, you can begin looking for advice on which technologies are best positioned to help you.

With this in mind, let’s look at a simple explanation of blockchain, and the potential implications. From there, you might get some ideas of how it can help your SMB solve specific problems.

A Simplified Blockchain Example

Imagine that you have a child in university, and every month, you send them a living allowance. There are a number of ways you can do this, but the most common is transferring money from your bank account into your child’s. There are two records of this transaction: a debit recorded in your bank account, and a credit in your child’s account.

In most circumstances, neither of you can see the other’s bank records. Banks keep separate ledgers on their customers’ behalf, and they spend a lot of time and money ensuring that these ledgers are accurate, and private.

But what if you didn’t want the ledgers to be private? What if you wanted both you and your child to have access to a single ledger, with all transactions visible to you both?

In the past, this would require setting up a joint bank account. Blockchain offers a different approach.

Now imagine that, every time you send the monthly living allowance, you laid down a “block” with the transaction information carved into it (date, time, amount, and so on). Both you and your child can see the block, confirming that the money was sent and received. Your spendthrift kid couldn’t come back to you a week later claiming that “the bank screwed up” and the transfer never came through.

Every month, you lay down more blocks, which form a “chain.” Together, they create a record of all transactions with your future college graduate. When you get old and infirm, you can point to the chain, show your kid how much money you paid for college, and demand that they invest a similar amount in a high-quality nursing home.

This is, more or less, how blockchain works. Each block is a record of a monetary transaction. The chain is a shared accounting ledger that is visible to all parties across multiple networks, or “nodes.” Every new transaction is verified by all nodes and, if valid, added to all copies of the ledger—in other words, a new “block” is added to the “chain.”

The chain is cryptographically secured, so nobody can change a record once it has been inscribed. And even if you were to find a way around the cryptography, the records are visible to all members—making it nearly impossible to change a block without someone noticing. The most you can do is lay down new blocks.

Until now, exchanges and transactions of all kinds—including money, commodities, stocks, loans, and products—have required each participant to track every transaction using its own ledger. Most of the time, this works very well. But occasionally, ledgers get out of sync—leading to audits, mistrust, and increased scrutiny.

The difference with blockchain is that all parties use the same ledger, which is visible to all participants. Ledgers can never be out of sync when there is only one of them.

Why Blockchain Matters

This new approach to monetary record keeping offers multiple benefits, including:

  • Increased transactional trust. Since every participant can see every block in the chain, it’s easier to ensure that all transactions are above board. It’s hard to deal under the table when everyone is watching.
  • Reduced fraud. Similarly, it becomes difficult—if not impossible—to hide, misrepresent or delete monetary or other transactions (for example, the movement of commodities).
  • Reduced risks and associated moral hazards. With more trust and reduced fraud, enterprise risk is likewise reduced. Moral hazards are harder to hide as contracts and deals are evaluated.
  • Lowered transaction costs and faster processing times. Fewer systems and organizational infrastructure simplifies and speeds up the entire transaction process, for less money.

Blockchain Beyond Finance

The disruption opportunities of blockchain will not be limited to financial services. Consider other industries that move products through distribution, or even utilities that measure and track the use of electricity, water, and sewage. Short term housing rentals, car sharing, and food production from farm to fork could experience disruptions driven by blockchain.

Examples of rapidly evolving blockchain applications include online voting, medical record keeping, provenance of art and historical artifacts, non-profit banking service for regions and populations not served by traditional banking, and process automation for generic, time-consuming back-office activities.

Other potential uses include distributed procurement through a network for vendors, and loyalty management programs for consumers. With blockchain, you might soon have the potential to securely and safely extend your record-keeping systems outside the business, reducing friction with trading partners, or even with customers.

The Implications for SMBs

One of the great advantages that SMBs have over their larger, more established competitors is that they can move more quickly to take advantage of new business models. Think of how Uber and Lyft up-ended the taxi industry, or how AirBnB is changing the way people travel.

These innovative business models were, without a doubt, enabled by digital technologies that did not exist 10 years ago. But the true innovation is in the business model, not the technology.

When looking at blockchain or any other new tech, think first about the potential ways that it can help you solve a problem, or change what you offer to your customers.

Then go out and look for the right technology (and the right provider) to help you do it.

GO for Growth - Transform Finance First.

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