Blockchain Insider –What, Why and How of Blockchain (Part 1)

Figure 1 Image credit https://engineering.eckovation.com

What’s the Problem

Traditional Bookkeeping

• A grocery seller (retailer) transacts with numerous customers daily and performs an exchange of goods. The grocer keeps track of each exchange of goods on a digital/analog method of record to maintain inventory of items. Whenever he wants to procure new stock, he places an order with the distributor (via a phone call, the distributor’s website or other methods).
• The distributor now packages the order and ships it via a logistics (shipping) provider — who maintains its own system of record to keep track of items, and then delivers the goods to the grocer, who takes stock of the input and enters the details in his own system of record
• At this point, we see that there are 3 systems of record: Distributor, Shipper, Retailer; each one maintaining records in their own way. Whenever a handover happens from one party to other, there is a re-entry of data in the receiver’s system, as well as a reconciliation of the entered data against the invoice provided
• If the grocer receives a shipment that doesn’t contain the items as originally ordered — any of the 3 parties could be at fault:
  1. The retailer didn’t order the right amount of items
  2. The distributor made an error (maliciously or otherwise) while collecting or packaging the order
  3. There was a problem during the handover to/from the shipping provider
• Such problems are common-place and reconciliation of these case is time-consuming, requires additional manpower (especially for larger organizations), and causes loss of customers due to product unavailability — this has ripple effects all over the business network.
• Now imagine
  1. A single distributor supplying to multiple retailers and logistics company
  2. A single retailer ordering from many distributors
  3. A single logistics company transporting from multiple distributors to multiple retailers

The problem just became complex many manifold

The Intermediaries

There are a few ways to resolve this problem:

1. The retailer places full faith in the distributor to correctly manage his orders, and in case of any problems, the word of the distributor is final and binding
2. The other (common) option chosen by most parties where there is an absence of trust is to bring in a trusted intermediary
   a. This intermediary now acts as the central store of record and order management is done via the intermediary’s software application
   b. In this case, the word of the intermediary is final and binding, which is fine since both parties trust this intermediary to be fair
   c. As with most things, nothing is ideal, and this trust-model may cause the below problems
   — Defraud
   Intermediary is bribed by a major distributor to be dishonest and forge records.
   E.g. add a few items on retailer’s order and delivery records from time to time
   — Cost
   Intermediaries can command significant fees to facilitate and maintain business operations. Imagine paying a third party because you don’t directly trust all the parties you deal with.
   — Censorship
   The intermediary can blacklist any organization and effectively boot them from transacting on this network
   — Single point of failure
   Intermediary’s infrastructure goes down due to power outage or calamity
   — Vulnerability
   Hackers must hack into one single internal network of the intermediary and they can make away with a treasure trove of all the sales and turnover data of the retailers and distributors
   — Compromised Privacy
   Every distributors and retailers reveal valuable sales data to the intermediary

What Are Retailers and Distributors To Do?

They need to go back to trusting their own ledgers. But we said earlier that the siloed ledgers often diverge causing all the problems mentioned.

So, what we really need is a “shared ledger” — A way to record the same data across multiple parties with guarantees that everyone sees the same data on the ledger completely under their control

Figure 2 Image credit https://bitsonblocks.net

To summarize, we want a system of record which

• None of the parties control
• Can be written to by any party
• Can be relied upon by everyone
• Keeps data in sync all the time

Decentralized Trust

Blockchain, in the simplest terms is a decentralized database that gives us exactly these properties

1. Trusted data
   No centralized control or ownership of data — each party maintains a verified record of all (relevant) data on its own
2. Multiple writers
   Allows distrusting parties to write to the ledger based on rules (via “smart contracts”)
3. Immutability
   Provides integrity of data using various cryptographic techniques
4. Provenance
   The entire lifecyle of an asset can be tracked genesis to end
5. Disintermediation
   Because of decentralization of control and native trust in the Blockchain’s data, you can get rid of, or reduce dependency on intermediaries.

For this first installment we will leave you with the problem we have set out to solve and an envisioned solution to it.

We will continue peeling the blockchain onion one layer at a time in the subsequent releases of this newsletter.

Co-author — Amol Pednekar