Blockchain is everywhere these days- financial newspapers, tech magazines, android games. With the bitcoin and other cryptocurrencies seeing the kind of mercurial rise no other asset class has seen before, it’s become a traders’ paradise (I dare not call them investors). And it’s a shame; because within all the eye-grabbing headlines, there is hardly a mention of the technology that works behind it. For a true tech enthusiast, though, this should be least interesting aspect of blockchain, considering the innumerable promises it holds for technological disruption.
There is good reason to believe all the hype surrounding it and there are a number of firms that are jumping on the bandwagon and offering services, exploring use cases and, in some cases, watching with curiosity the way industry is responding to the lure. Technology firms in particular are trying to make the most of this while they themselves grapple with the idea of adopting it as part of their core business offering. Providing Blockchain as a Service (BaaS) is the safest approach that tech companies are using to benefit from it since a lot of clients are willing to explore the use cases with standalone applications but unwilling to meddle with their core business applications. The focus of this article is on why most businesses are unlikely to adopt or integrate blockchain with their core systems, especially the ERP system, in the near future.
There are few aspects of blockchain which needs to be understood when talking about it in relation to an ERP.
- Blockchain is write-only data structure, where new entries or transactions get appended at the end of the ledger/block.
- The new block is linked to previous block and any modification in the new block requires modification to be made in the previous block (which in turn in linked to previous block) and so on. So it is practically impossible to modify the existing data. This makes it tamper-proof.
- Typically, all users (nodes) have equal permission or controls over the database. Although some blockchain networks like Quorum allow permissioned nodes for separating read/write authorizations, these are various limitations.
Reasons for blockchain to not be adopted/integrated with ERP systems
- As a database, blockchain is inefficient – In terms of record keeping, the blockchain is a very limiting database. There are only few predefined queries that can be done on it and the storage is also inefficient. So even though you may have tamper-proof data, it may not be of much use for generating actionable insights, although it is certainly useful for provenance.
- Gaps in security – The most favourable use case for blockchain is in transaction processing. Financial service sector has, ironically, been the most critical of the technology while also being the most curious. However, this will not be adopted by clients unless they are absolutely certain that there are no security-related issues with the network. Since blockchain have been known to be prone to security vulnerabilities, a large scale adoption by businesses for transaction processing (such as payments) is out of question. Admittedly, this is a concern that will be addressed sooner than the others since there is already a vast improvement in security features in today’s technology than a couple of years ago.
- Need for common platform – Another promising use case of blockchain is ‘smart contracts’. In simplest terms, while a standard contract outlines the terms of a relationship (usually one enforceable by law), a smart contract enforces a relationship with cryptographic code without the need of a middleman. In ERP, its use is being seen to benefit supply chain management, in particular, and many organizations are experimenting in this space. However, for the supply chain to be truly integrated for smart contracts, a large part of your supply chain vendors must be on the same blockchain platform. Currently, the task of bring all players on blockchain itself looks challenging, let alone agreeing on a common platform.
- Unclear competitive advantage – Corporates are risk-averse in general and tend to avoid experimenting with a technology unless it gives them a definitive competitive advantage. Since the success of blockchain would largely depend on collaboration of large number of business partners (as the above point indicates), it is difficult to gauge any true competitive advantage if blockchain is adopted in isolation. This is starkly different from other emerging technology, for example machine learning, where a customer insight is gained or repetitive tasks is automatized, which is immediately translating into added business value.
- Regulatory resistance –Blockchain has been at the centre of media attention in the last one year but it has not always been for favourable news. There is a certain shroud of mystery around it and governments and central banks have been either critical of it, suspicious of it or have stayed mute on the subject. Although most of the resistance is directed towards cryptocurrencies and not on the technology itself, there seems be little coherence among governments and regulating bodies in terms of the compliances it must adhere to or the framework it must be governed under. Until there is greater clarity from central governments and banks, most corporate houses would ideally like to watch from a distance.
- The breakneck pace of change – The advances happening in the blockchain world is at a breakneck pace – perhaps the fastest that I have seen in relation to any other technology. In fact, it is so fast that if you haven’t been keeping tab on it for a couple of months, you are already out of date. And note that these changes are not incremental in nature, but radical – for example changes in method of consensus, reward features, latency. Evaluating the relative merit of each is a herculean task in itself. While this may be good in general, organizations do not like such drastic changes, they like things to settle down before they are sure of investing in it. Take for instance cloud computing – although it has existed for almost a decade, it is only now when most prominent players in the market are identified and the benefits are palpable, that organizations have started taking steps to adopt it. Machine learning too has been around for some time but organizations are beginning to start using it only now, and that too only because advancement in machine learning is incremental (although significant) and not radical which means that new set of capabilities can be added without fundamentally altering the existing ones.
Therefore, for the time being, I am inclined to believe that organizations are only going to experiment with this new technology without incorporating it in their core processes or integrating it with their ERP systems. Please note that this by no means implies that the technology is not going to be put to real-life use – far from that. Banking and insurance industry is already keen on exploring its possibilities and several governments are also exploring its use cases for making public services more efficient. It will and should be used where the sanctity of data is more important that its accessibility, where third-parties are not trustworthy and the concept of consensus is invaluable, and where transparency is of primary importance.
But as far as large-scale enterprise adoption is concerned, we are still at least a few years away, if not more.