Avidian Report – What is Blockchain?

INSIDE THIS EDITION:

When investors hear blockchain, most have only a vague understanding of what it is based on brief soundbites heard in the financial media. However, it is important for investors to begin to truly understand the business case for blockchain, especially as blockchain technology continues to be adopted and stands to create major opportunities across sectors.

At a basic level, blockchain is simply a shared ledger that cannot be altered which allows for the recording and tracking of assets in a network. Assets that can be recorded and tracked on this network include homes, cars, cash, land, patents, and brands. Almost anything that has a value attached to it can be put on the blockchain and traded. The most notable value-add over traditional transaction systems is that the blockchain eliminates intermediaries, thus simplifying processes, making transactions faster, improving security, and reducing transaction costs.

The chart below is an easy-to-follow representation of how blockchain works at a high level.

These benefits deliver the true value of blockchain. In business, users and entities can use blockchain to share a transaction ledger, set secure permissions, execute smart contracts, and have network transactions verified.

This is all made possible by having various participants play specific roles that guarantee the blockchain’s smooth functioning. The participants and roles are:

1. Blockchain users, who join a network and conduct transactions on the blockchain.
2. Regulators, who are granted special auditing permissions to oversee transactions that occur on the blockchain. These participants are often prohibited from conduction transactions on the blockchain networks they regulate.
3. Blockchain developers, who create applications and smart contracts that run on the blockchain and allow users to execute transactions.
4. Network operators, who have permissions and authority to define, create, manage, and in many ways, monitor the blockchain network. Usually, each business operating a blockchain network will have a network operator.
5. Certificate authority, who issues and manages certificates required to run a permissioned blockchain. A good example is when a user needs to be issued a certificate to execute transactions on the blockchain network.

These participants and the blockchain technology as a whole help remove many of the frictions that have historically existed when executing business transactions. For example, imperfect information refers to incorrect or inconsistent information between users of traditional transaction systems that cause poor decision-making and wasted time attributed to reconciliation processes. Or inaccessible information, which refers to storage, processing, sharing, and analytical constraints found in traditional transaction systems. These are just two of the many other frictions blockchain can eliminate.

Many believe removing these frictions will form the basis for the evolution of both the blockchain and businesses across industries and sectors, as well as accelerate the flow of capital.

Since we are talking about impacts on business, let’s look at a simple hypothetical case study to illustrate how valuable the blockchain can be for a business. In the case study below, we study a fictitious grocery store looking to resolve challenges associated with its supply chain. Namely, they are seeking to make their supply chain more transparent and increase the efficiency of goods tracking.

Case Study

Due to a lack of transparency in its food supply chain and inefficient processes, our fictitious grocery store chain has difficulty tracking and identifying its products. In a grocery retailer’s supply chain, this can become a major problem, especially because food can become contaminated and cause illness to its consumers.

While a traditional database might be able to solve some of the issues, they still would require validation of data by different parts of the supply chain which not only is prone to error and alteration but also considerably slows down the process which really can cause delays in getting contaminated food off the shelves.

Instead, the grocery retailer turns to a blockchain-based solution designed to improve the data exchange between supply chain participants and enable them to identify and track products more quickly. To accomplish this task, the grocery retailer inputs data for each product into a private blockchain that eliminates the need to validate data. It is all housed on the blockchain, so data validation is no longer necessary. This improves traceability, speed, and efficiency throughout the supply chain.

Rather than taking three days to get all the information properly validated, it can now be done on the same day. In other words, through this implementation of blockchain technology, our hypothetical retailer effectively eliminates the need for any data validation process, has supply chain data that is unalterable thus making the data extremely accurate, and, more importantly, speeds up all supply chain processes.

This is a big win for the retailer and the consumer because, with improved speed, it can help the retailer pull goods from their shelves much more quickly, if and when there is a recall, as an example, which mitigates risk to the retailer, cuts costs, and limits the risk to the consumer.

For the investors, blockchain in this case improves operational efficiency and cuts costs for the retailer which might translate into improving margins, reduced liabilities, and stronger growth. It is why we believe going forward investors should learn more about blockchain and how it might be leveraged to boost corporate results. After all, corporate profits have been shown to correlate with stock returns over time.

Weekly Global Asset Class Performance

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