At Simon Associates Management Consultants, we specialize in helping you and your company reach new heights. As corporate anthropologists, Blue Ocean Strategists and culture change experts, we help you re-think your business strategy so you can plan for the future in today's fast-shifting market. Blockchain is part of that future market (or really, the present one), which is why we urge our clients, and you our readers, to learn about it, look into it, and see if this might be the right time to incorporate blockchain into your business. As a first step, I invite you to read our blogs on the subject, as well as Michael's blog below.
From Guest Blogger Michael Olenick
Blockchain is like the gluten-free diet a few years back: everybody’s into it but nobody’s quite sure why, and few people really need it, though to those who do, it’s important. I’ll analyze blockchain through the only metric that really matters: value. But before doing that, we need to understand what it actually is. Here’s a (hopefully) easy-to-understand primer about what blockchain is. Don’t sweat the terminology; it will make sense in a few hundred words.
When I run my name, Michael Olenick, through the SHA-1 hashing function, it returns:
Hashing is a mathematical model that takes information and returns a unique string of letters and numbers. The same input will always return the same string. Conversely, different data will never return the same string.
No matter how long or short the data input, the length of the string will be the same. The SHA-1 hash (1) of the entire text of War and Peace is:
There’s vastly more input here — the text of the entire book — but the hashed string is the same length. If I hashed a digitized movie, a photo, a contract, or anything else, it would return a unique string the same length as my name. And every string would be unique unless the data input was exactly the same. War and Peace will always return the value above but nothing else will.
Getting to blockchain, if I used one or more prior hashes and added something else, it would make an entirely new unique hash. For example, if I combined the hash for my name plus the words "fell asleep reading," then included the hash for War and Peace, I’d get:
If I changed a single letter in War and Peace, or changed anything in my name, or wanted to change "fell asleep reading" to "is intellectually stimulated by," then the hashed value would change.
Hashing makes it is impossible to change anything without the hashed value also changing
The heart of blockchain is a running series of hashed values using the technique above. Every prior entry is appended by a new entry, forming a chain of entries. Each individual item is called a block. These chains of entries, or digital ledgers, include the hash value of the prior items plus the hash value of the new ledger entry. Those combined together create a new hashed value.
Chaining these blocks makes it impossible to change anything in the ledger without invalidating all the following hashed values.
Unlike a regular ledger, with blockchain the entries need not be only numbers. You can enter entire contracts into the ledger, combined with downpayment amounts and digitized signatures. Biometric information, like fingerprints can go in. Timestamps can and are entered. You can digitize a video of a signing ceremony and enter its hash value into the chain. Even DNA sequences of, say, plants or animals (sure, and people) can go into blocks to be chained together.
How can we ensure somebody wouldn’t change all the prior blocks?
Each block in the chain is essentially a receipt. If somebody tried to change a prior entry, then all the hashed values on the subsequent entries would become invalid. They could try to change something, but everybody would know, plus they'd know which block was changed, making the change pointless.
To increase security, we can also demand the chain, or at least the current value of the chain, be made public. That would make it impossible to change the prior blocks without the public knowing.
Blockchain itself is often tied to an open ledger where anonymous people record transactions and keep the running total. Maintaining this ledger is baked into Bitcoin mining to incentivize people to keep ledgers. By maintaining the ledger, there’s a chance to make bitcoins out of thin air — one is generated about every ten minutes.
Why would ordinary people care about a system where the accounting entries of a ledger could never be changed?
For that matter, why would ordinary people care about accounting at all? Accounting classes aren’t exactly the rage. If they were electives, they would be filled with the pocket protector crowd and little else.
Blockchain and Bitcoin were released together in 2009 at the height of the financial crisis. There was an implicit fear that, with the chaos during that time, banks would cheat. Blockchain makes cheating impossible.
Somebody using the pseudonym Satoshi Nakamoto released Bitcoin and its underlying ledger, blockchain, in response. Since blockchain was open-source and is not controlled by any single entity, nobody could corrupt the ledger.
Of course, the financial system has since healed and trust has been restored. Bitcoin has become a speculative investment. But blockchain — tying together blocks of transactions in chains — really does increase value by raising trust while lowering costs by providing an ongoing auto-audited transaction chain.
All this leads to an obvious question: given that all blockchain does is prevent cheating, and the core hashed ledger is inexpensive to implement, why don’t existing ledgers simply adopt these techniques? Why doesn’t every receipt contain, say, an immutable hashed value of your purchases and also the hashed value confirming payment? I don’t know.
Blockchain and the hashing that underlies it open all sorts of interesting potential applications. Hashing contracts with signatures, terms and timestamps is an obvious addition. Adding a payment ledger to the mix, a mini-blockchain — itself possibly an entry in a larger blockchain of all entries for a securitized trust – seems obvious.
There is a lot of hype and, apparently, a lot of money going into blockchain
And some of the hype makes sense. I thought about using blockchain to track the DNA of wood to ensure it was sustainably harvested. It’s easy to imagine stamped email ensuring the sender is who they say they are and, if not — if the email is spam — to quickly delete it. Contracts and land recording are also obvious uses.
But, like most fads, a lot is far-fetched or nonsense. We’re not going to stick every web page on a chain of blocks (interestingly, one of the original purposes of hashing was security for digital rights management — it was and remains widely disliked).
Too much blockchain hype is driven by people who equate interesting technology with value. They’re jumping on a bandwagon because the tech sounds cool, not because there is a useful implementation.
Blockchain is likely here to stay
I can’t really see the purpose of distributed ledgers but, hey, the only thing they’re doing is wasting electricity (albeit quite a bit of it with Bitcoin). Will blockchain change the world? Who knows...predicting the future is dangerous stuff. Might it help reduce fraud and spam? Probably, once the hype dies down when technologists get their act together. Can it increase value while reducing costs? Yes, but it’s important to focus on the applications that do this, not on the technology itself.
(1) Brief but important digression: there are countless hashing algorithms, i.e., methods for turning data into a unique string. As computers get faster, they get better at guessing what the string might be. In response, the algorithms become stronger. Unless you’re working for the NSA or some equivalent, the details don’t really matter except that SHA-256 is stronger than SHA-1 but they both return a unique string. Most hashing algos are available online, for free, with implementation in the major programming languages. And, they’re easy to use.
About Michael Olenick
Having worked extensively with SAMC’s European and Middle East clients on Blue Ocean Strategy, Dr. Michael Olenick now leads our Europe and Middle East division, helping our clients in those regions rethink their business strategies to sustain growth in fast-changing times. Even before the launch of the groundbreaking book, “Blue Ocean Strategy” (which has sold 4 million copies to date), Michael was a Blue Ocean Strategist, working with Blue Ocean Strategy co-founders W. Chan Kim and Renée Mauborgne since 2001.
As an Executive Fellow at the INSEAD Blue Ocean Strategy Institute in Fontainebleau, France, Michael advises, consults, researches and teaches Blue Ocean Strategy throughout the world, helping companies from startups to Fortune 100s implement its highly successful business strategy. His research has been cited in leading business publications, including The New York Times, The Wall Street Journal, The Washington Post and Bloomberg, and it is also being taught by leading business schools.
For more on blockchain, check out these 3 podcasts
- Jake Manthei—A Family Firm That Lives Blue Ocean Strategy®
- Marton Ven—Applying Blockchain to Every Detail of the Food We Eat
- Sam Radocchia—Ready To Trust Blockchain With Everything From Your Food To Your Taxes?
SAMC Guest Bloggers
We have a select number of guest bloggers whom we have invited to share their insights with our readers. They bring different perspectives to the challenges of change, innovation and opening new market space...recurring themes here at SAMC. Please enjoy their viewpoints and share them with others.
- Two essential Blue Ocean books: Blue Ocean Strategy and Blue Ocean Shift
- My award-winning book: On the Brink: A Fresh Lens to Take Your Business to New Heights
- Simon Associates Management Consultants website
From Observation to Innovation,
Don't miss a single episode of our On The Brink podcast!