Blockchain vs the traditional database – making the case

Background

Blockchain (aka Distributed Ledger Technology (DLT)) is seen by some, as the most important technology innovation since the introduction of the internet. It has the possibility to cut cost and complexity from managing transactions as diverse as a bank settling a currency trade to a supermarket tracing the provenance of the pork it sells.

As part of a client project we at PwC recently created a working Proof of Concept (PoC) demonstrating the ability to support an Insurance claims management process. The PoC was developed working with a number of participants from different firms and highlighted how the workflow could be digitised and orchestrated between the parties to create efficiency.

The objective of the PoC was to explore the technology and demonstrate that it had the potential to provide a solution. The PoC succeeded in its primary aims and highlighted improved automation between multiple parties but some healthy and challenging questions arose that asked us to compare the benefits of blockchain by comparison to other more established technology solutions (for example a relational database managed by a central party).

 The core of the question is “Digitising this process has real benefit – is blockchain the best way to do it ?”

In trying to answer that question we came up with the following thoughts.

General Characteristics of blockchain

 Whilst, distributed ledgers have been around for a long time, the PoC illustrated some of the characteristics of blockchain that have driven the huge increase in interest. The technology solves a long standing problem, that of allowing multiple parties who do not fully trust each other to update information without a central party managing a centralised record. Previously business problems that require multiple parties to share and update information have required a central authority that becomes a natural monopoly. Inevitably, these intermediaries add cost, time and complexity to business processes.

Richard Gendal-Brown one of the key architects at R3 states: “Distributed ledgers – or decentralised databases – are systems that enable parties who don’t fully trust each other to form and maintain consensus about the existence, status and evolution of a set of shared facts”

A number of the perceived blockchain benefits that the PoC illustrates are:

• Each party has their own copy of the shared data and every party is seeing a common shared “single view of the truth”. This eliminates the need for a firm to reconcile their copy against a centralised view or another parties view
• There is no single point of failure. If a party in the blockchain network are down (either through a fault or because they are in a different time-zone) the other parties can access their records and transact
• Different parties can have different “permissioned” roles. The role that can be completed is coded within the contracts and demonstrable to all parties.
• The technology provides an excellent, complete and tamper proof transaction history, complete with time-stamping. This can reduce disputes and eliminate fraud and enhance auditability of the transaction.

 Based on these characteristics PwC have developed a set of six questions that can be used to identify primary candidate business processes where the technology is most applicable. For any process where four or more of the following can be ticked there is a strong case for considering blockchain:

1. Multiple Parties Share Data - multiple participants need views of common information
2. Multiple Parties Update Data – multiple participants take actions that need to be recorded and change the data
3. Requirement for Verification – participants need to trust that the actions that are recorded are valid
4. Intermediaries add cost and complexity – not creating or the removal of an existing “central authority” record keeper intermediaries has the potential to reduce cost (e.g. fees) and complexity (e.g. multiple reconciliations)
5. Interactions are time sensitive – reducing delay has business benefit and/or the time that information is updated or a transaction agreed is important
6. Transaction Interaction – transactions created by different participants depend on each other

Differentiators

The PoC demonstrated the digitisation of information capture that replaced a number of manual steps where information is updated independently by each party and messages are sent back and forth (potentially by messaging services, email, fax or physical documents). In addition to capturing the core data that drives the workflow additional supporting documents could be loaded (as scanned documents, PDF etc) that provide supporting information.

We agreed that much of the benefit demonstrated is not unique to blockchain and comes more from general automation and digitisation that could also be achieved by other means. These could for example, include a central party that maintains an authorised master record and manages the updates through a messaging service.

Whilst blockchain was not the only way to solve these types of business problem it does have a number of differentiators that provide particular benefits by comparison to the alternatives:

• Data is shared between parties where each party has their own view of the data. This is significantly more efficient than the scenario where parties have their own isolated copies of data that they try to keep in line thorough sending messages about updates. Each valid update is shared and visible to all parties once confirmed and so there is no duplication of data entry or need for reconciliation.
• A party can use its own version of the data to drive internal processing. This has the potential to be significantly more efficient than a process of using an internal record that is then “kept in line” with an external third party view (but which may be out of line at some points due to errors or timing issues).
• All parties see the same data and all parties know that every other party is seeing the same data. The possibility for disputes is dramatically reduced.
• The data shared on the chain is the same for all parties. Data standards must be agreed up-front but as a result the possibility of errors caused by misaligned reference data are significantly reduced.
• The shared data allows participants to drive process efficiency across the whole interaction allowing automation through orchestration of interactions between parties. The benefits that can be achieved are greater than those that can be achieved focussing on just the internal processes of each firm
• There is no need for separate messaging infrastructure. Updates happen within the data held on the chain and business process is driven by data updates rather than sending messages that (should) result in data updates.
• The lack of a single authority point eliminates a single point of failure for the system.
• The technology has in-built support for creating a tamper-proof transaction history that can be used to provide the indisputable record of a transaction. This includes all updates including supporting documents attached to a record.
• Due to the peer to peer nature of the network it is relatively straightforward to add additional nodes. Thus the network is inherently extensible with new parties that want to join facing a low barrier to entry.
• Because processing is distributed the network is inherently scalable – as the network grows new processing nodes are added.
• The technology is developing rapidly in an open-source environment. We have seen rapid progress in dealing with limitations of the technology over the last year and expect that to continue.
• As a new technology the applications are well positioned to take advantage of cloud computing with major providers such as IBM, Microsoft and Amazon all developing blockchain software as a service (SaaS) offerings. This positions it well to take advantage of cost effective deployment options. 
• In summary this technology has characteristics that make it especially attractive for any process that relies on multiple parties managing a common set of data that needs to be updated by many of them. By sharing a view of the data and making the update of the data the driver of an orchestrated business process participants have the opportunity to make the whole process efficient; both within their own firms and across the whole of the ecosystem.

Implementation Considerations

There are a number of factors to consider around implementation:

• This is a new and evolving technology, new functionality is being released and technical issues are being resolved all the time.
• Coordinating the way in which multiple parties will interact on a blockchain will require agreement around business processes across all parties. Complexity is therefore driven by the numbers of parties that need to agree.
• The impact of sharing data using this technology will clarify as participants start to implement initial applications. The experience will shape thinking and new opportunities for benefit will become apparent through experience.

For the reasons above we believe that an iterative approach to developing and releasing applications is the right one. This approach targets early release of functionality that generates some level of benefit in its first pilot release and is enhanced through subsequent releases to cater for more complex processes and larger numbers of participants.

Ideally each release would both prove the technology and process as well as providing business benefit for an area which is particularly prone to error or costly. Once the pilot is released and successful, subsequent releases iteratively add value by the expansion to new participants and of new functionality.

• Focuses on concrete results that demonstrate progress and release early value (PoC to Pilot should be achieved within 6 months)
• Allows the participants to quickly benefit from technology developments in the underlying blockchain fabric as they happen
• Allows participants to gain experience from using the technology and adjust thinking on business process change and priorities based on this experience so that maximum benefit is gained from experience
• Exploits the extensible nature of the technology, reducing risk through shorter cycles of development and delivery.

Summary

Like any technology blockchain has a number of strengths that make it a very strong solution for specific business processes. The ability to impact processes across multiple parties, creating a trusted and consistent set of common data and orchestrating the interaction between market participants of all kinds clearly has application in the wholesale insurance market.

Given current levels of market interest, investment in the technology and development we believe blockchain will become the de facto standard technology used for this type of multi-party data application within five years. Solutions that are being developed in the next year to eighteen months therefore, need to consider what the target environment will look like in two or three years’ time.

An approach that seeks to deliver part of a solution through blockchain can benefit from the iterative approach by focussing on those parts of the process that most benefit from distributed data, proving benefit, learning and adjusting. The technology is ideally suited to this approach.

Steve Webb PwC

@stevewebbpwc