Blockchain — What You Need to Know

AI is transforming the world. And it starts with the right compute. ARM is the AI compute platform trusted by global leaders, proudly NASDAQ listed, Built for the future. Visit arm.com discover.

Welcome to the HBR IdeaCast from Harvard Business Review. I'm Sarah Greene Carmichael. Think about the term driverless car. It's obvious what that means, right? It's a car without a person behind the wheel. As new technology comes along, we often base our descriptions of the new about what we know of the old. But someday, driverless car will sound as antiquated as the term horseless carriage, which of course is what cars were first called back when the internal combustion engine displaced horses. And actually that other word, automobile or automobile, is probably better for the driverless vehicle of tomorrow than it ever was for the car of yesterday. But sometimes a technology comes along that's so new and so potentially groundbreaking that it's hard to even describe with the language of the past. Take blockchain. You might know that it's the revolutionary technology behind the digital currency Bitcoin. But do you really know what it is? Can you describe how it works to a friend? Do you know how it could change your industry, your business, even maybe your life? Joining us now to help us understand this new technology and its profound implications for commerce is Karim Lakhani, professor at Harvard Business School. He's also the co founder of the HBS Digital Initiative. Kareem, thanks for talking with us.

Thanks. Great to be here.

So what is blockchain, probably the most.

Hyped term in the history of technology and business? It's going to save the world, it's going to cure diseases, it's going to be amazing.

I might have just done a little bit of that hyping myself.

Exactly. So blockchain fundamentally is a ledger. So ledger, meaning keeps track of transactions. Now, most ledgers tend to be private. You know, you have your own checkbook that you don't share with your, with your friends and family, maybe your wife or your spouse or your partner. Blockchain basically says that the ledger and the transactions that take place within the ledger are going to be shared across all people of interest. And that's like the foundational aspect of blockchain, that in the end, it's a record keeping system that keeps track of any type of transaction between two parties. But the records themselves are distributed across any interested party that has access to those records. Throughout history, we've kept ledgers private, and now we're going to keep ledgers open. And once we start to think through all the ways in which keeping track of any type of transaction is core to our organization is core to the way the economy works. A whole new sets of applications are now being thought through because blockchain exists.

So some people might be confused by the description of it as a public ledger because it is also anonymous. How can something be both public and anonymous?

The key element of the publicness is that the transaction is recorded, that something transferred between party A and party B, party A and party B themselves can be anonymous. Could be pseudonymous in the sense of you could have your own pseudonym. That's the trick of blockchain, that it preserves the transaction history, makes that public, but the parties don't have to reveal themselves in a public blockchain setting. There are many implementations that are private blockchains where you might decide to keep the parties identified.

So you have these records that are anonymous and pseudonymous.

Yes. And they are pseudonymous parties, but the records are public.

Yes. Thank you. How does this system confirm the transactions that have actually happened?

Yeah. This was sort of the genius of Satoshi Nakamoto, whoever he is or they are. That's like the mysterious part about we.

Don'T even really know who invented it.

Yes, yes. When a transaction is posted on the network between two parties, other nodes on the network compete to create solving mathematical proof that locks that transaction into everybody else's ledger as well. So if you wanted to go back and hack the blockchain ledger, you. You would have to undo every single other prior transactions. And that proof of work and the chain aspect of the block. A block is a transaction. It's chained to all prior blocks is what makes this the interesting technological innovation that the blockchain is.

What are the implications of that for who can use it?

The way to start thinking about blockchain is in terms of networks. As we start to do transactions, we can have it limited between just a few parties inside of our organization, few parties inside of our ecosystem, or we could go on the public web as well.

So when you're talking about these private blockchains, how might an organization use something like that to, I don't know, make part of their work easier, more secure, otherwise better.

Yeah, yeah. So I think a good example of this is sort of what's happening in the finance and financial services. If you imagine it takes us seconds to do a stock trade. So we say, I'm going to buy a certain stock and then I'm going to sell you certain stock. And that record happens instantaneously. The marketplace handles hundreds of millions of Transactions a day. But the settlement, the fact that now the securities are going to change ownership can take days, two, three, four, five days. What the financial services industry is doing is saying that right now we have all these intermediaries that play the settlement role that verify that money has transferred over, that the security has transferred over. All of that we can actually put on the blockchain. We can put both the cash that Sarah has and the securities that she has, along with the cash that I have and securities that I have on the public ledger. And then we can do just a transaction across the table, two of us on this public ledger that takes place. So the settlement can also be instantaneous instead of taking multiple days. And that massively reduces the friction that takes place in financial services.

Is the basic gist of blockchain similar to the basic gist of so many digital technologies, which is just disintermediation, bringing the ends of the chain sort of closer together.

Yeah, I think that's a good way to think about that. In many ways, web technologies, inner technologies were designed around peer to peer connectivity so that all.

Taking out the middleman.

Taking out the middleman. Right. We don't like the phone companies in the middle. What we want are peers to connect to each other directly.

Right. We don't want CD stores. We just want all share files on the web.

Exactly. Napster. I love Napster. And so currently the excitement and the explosion is in all the different things you can do because record keeping has now become distributed and is becoming peer to peer.

Yeah. Some people clearly have benefited enormously from these developments. So Google, other people have sort of ended up as the kid who has nowhere to sit down when the music stops during the game of musical chairs. Right.

Like all retail stores.

Like retail stores, record labels, things like that. So when you think about blockchain, where do you see kind of potentially some winners emerging and then maybe some jobs that will be automated or lost as a result?

Look, a scary thing would be accounting firms. All they're doing is they're verifying transactions that took place. If blockchain takes off as the system of record inside of organizations, then we will need a lot fewer accountants. So that can have massive, massive impact. One of the most interesting aspects of the blockchain, because it's a digitally native technology, is that it's also programmable. Right. You can program logic around it. So when a certain truck arrives at a certain supply depot, based on GPS coordinates matching, we will release the funds, you will release the goods, and we'll release the funds. Right now the way it works is that the materials that are transported, then we email them or we send them an invoice, then it takes 30 days to process and then the check gets written or some, some electronic payment is made. But that raises the questions about lawyers. Lawyers are the arbiters of contracts and all of a sudden the contracts are going to be automated and that the intermediary roles that lawyers play in defining contracts and figuring them out in writing contracts may be up in the air. So we won't need as many. Right. Because if we can automate contracts, then once you have a template of one contract, you can replicate that over and over again. You don't need to Denovo create brand new contracts. Law is also code. But now if you can actually create a digital representation of the code and be clear about the if and then statements that are within the legal code, then, you know, it opens up a whole new set of opportunities and threats for the existing law profession as well.

What about areas of opportunity? I mean, we wouldn't have been able to predict things like that. There would be this huge app development economy for mobile phones. The first iPhone only came out 10 years ago. So while I'm sort of aware that it's hard to predict where you'll see areas of growth ten years from now.

What do you think around blockchain? Yeah, yeah. First is over the last four to five years, over a billion dollars has been invested by VCs in blockchain companies. So just the energy being dedicated to this tells you that things are going to pop. Secondly, some of the most conservative institutions in our economy, banks are also embracing or trying to figure out what to do with blockchain. And if the most conservative institution starts first, that tells you something is going on from a purely innovation point of view. Lots of investment, lots of interest, lots of people participating in the blockchain ecosystem. My sense is going to be around what I would call sort of efficiency enhancing applications. It's just lowering the transactions cost for parties to work together. That's why we see so much interest amongst banks. Reducing those costs does two things. It unlocks value so you can do more things, you can lower your own costs, you can participate, you can take that money and do something else with it at the same time. There are jobs tied to those transactions. Right. There's people that are recording them, people that are taking faxes and responding to those faxes and so forth.

You know, it's amazing that you still have to fax things, by the way.

Well, look at the US Healthcare system, those will disappear. Right. And so we will have more money for healthcare because the costs have been lowered. Conversely, we will have this adjustment of the people that were doing those transaction heavy friction heavy tasks that now need to be reallocated and retrained.

It also seems like organizations always seem to start by chasing efficiency.

Yes, absolutely. It seems like the obvious thing to do.

Exactly.

So that's the first place. So just imagine another interesting set of applications are in supply chain, like tracking the provenance of goods from diamonds to agriculture and so on. Given that we care about where our products and services are coming from, I think. So the provenance tracking aspects of blockchain in the supply chain I think is going to be quite interesting. And there's a bunch of startups that are trying to do that and it's sort of building already on like, oh, we have RFID tags and so forth. We can now start to take that component and then start to build the history of the, the flow of goods on the blockchain. So that again is publicly verifiable.

This has been such a pain point for apparel companies, food companies, all kinds of companies who ship goods across the world.

Yeah. The problem with supply chains is one of trust. Like do I trust a company saying that this has been ethically sourced, organically sourced, non GMO sourced, or without child labor? You know, all those things. Right. And so you have to actually rely on the brand and the brand's promise and you hope that, you know, they're doing the right thing. Because right now it's actually impossible for me to look at the grapefruit that I have from my store and know that this was actually grown in an organic farm from farmer Joe somewhere in California. So the notion, the promise of blockchain is to say every single transaction, from the seed to the fruit to the harvesting is going to be recorded and it's going to be publicly available that I'll be able to track its entire flow. And so that, I think is the most exciting part about blockchain's application and supply chain is that we don't have to rely on the brand to trust the provenance or the promise of the goods that are being created. If the entire supply chain is in the blockchain, then I should be able to go in and double click and see it all the way back to its origins.

Well, and firms can track it too, right?

Exactly.

One of the big challenges for some apparel companies has been that they didn't realize their clothes were being made in those conditions.

Absolutely.

They say Anyway, the other thing that's interesting about that is. So we've talked a little bit about how blockchain might take some jobs away. And. But it seems like if one of the things consumers want is sort of increased transparency and quality and good jobs, say to know that the person picking that organic grapefruit is fairly paid and organic grapefruits might take more labor to produce.

Yes.

That actually the blockchain might in some way be able to also support better quality jobs throughout supply chain.

Absolutely. Look again, it goes back to transparency that if I can see the transactions take place, if I see that worker Smith made 10, $15 per hour and picking the fruit and that transaction is publicly available, then I can see why it cost me X amount of money and what the share is of profit that's being extracted from the supply chain coming through right now. We don't have that level of transparency, providing that transparency is the promise of the blockchain.

I want to ask you about the arts because some of the most interesting arguments I've seen about this are relevant to the arts. And, you know, the Internet really, especially for musicians, totally changed the revenue model for musicians and for their labels. So now some people are saying blockchain could be used to help. Help musicians make money again.

Yeah. No. So I think, I think, I think it was Bette Midler who said there was like millions of streams of her songs being played on Spotify, but she only made like $16 or some. Some ridiculous amount from it. The reason was that the contracts that these artists had signed with their labels meant that their digital rights were basically going to the label and not to the artist. Right. So Spotify is spending a lot of money, you know, giving, you know, most of the revenues to the labels. But. But labels keep the giant share because the contracts that were signed by artists were geared towards them getting royalty from the physical goods, not from streaming. We now see artists saying, I don't need the intermediary of either a Spotify or a label for me to actually get the transactions. Come to me directly as the artist. And then just like our example of financial settlements. Right. I listened to my favorite ACDC song a million times. By the time ACDC gets the royalty for it, it might be months, if not years. Right. With the blockchain, you could actually make it instantaneously and that there's no intermediary in between, takes a cut from it and also delays the time it takes for the payment to show up as well.

And so whether we are using the blockchain for music royalties contracts, utility distribution, supply chain finance, whatever we're using it for. All of this rests on it being really secure system.

Yeah.

And how realistic is it that this thing will stay secure or that some hacker will figure out how to hack it? Just like they've kind of figured out how to hack everything else that we've ever invented?

Yeah, I think, I think that's like. I think this in many ways, I think. So there have been hacks around blockchain, more around the endpoints of how people connect to the blockchain in terms of the wallet systems that have taken place or the logic that was set up in the first place. But the core aspects of the blockchain and the irreversibility of the. The transactions taking place so far have not been hacked. You know, no system is unhackable. But the structure of blockchain and the way it's been cleverly designed means that it wouldn't be some kid in their basement. As, you know, many politicians talk about these days, cracking the system. It would require concerted effort by state actors or by people with lots of resources to go after this. Almost like the James Bond type villains, you know, doing these kinds of things. Now again, remember that the way the blockchain is set up is that there's no central node that can be hacked. Right. You would have to not only hack the chain and reverse the transactions, but then you would have to actually impact every single peer that has a copy of that ledger as well. That doesn't mean those things won't happen, but it would require extraordinary effort to do the hacking.

So if we are still today in the kind of dial up modem days of blockchain, how quickly do you think we'll be advancing and how soon should managers really start to think about this and what should they be thinking about when they do?

Yeah, I have fond memories of the squawks and squeaks that my dial up modems did. It was amazing when I had 2400 bauds and I went to 9600 bots, it was just incredible. So several things have changed which tell us that the uptake I predict will be faster than what we had in the last sort of the world Wide web revolution, or even the mobile phone revolution. What that means for managers then is that the time to experiment is now. What you want to do is make a bunch of bets, make some investments, small investments, so that you can learn. I bet you for, you know, the senior executives that are listening, you know, there's a bubbling up of energy within their organizations, amongst their IT groups, amongst their innovation groups, amongst, you know, the marketing groups. Let's do something with blockchain. Let's do something with blockchain. You should help finance that, you should help fund that. Give them the space and the room to experiment and learn from that. So I think that's like the first thing you should do. And then as the prototypes get built, you might see, oh, this is promising, let's actually go after that. As much as there's going to be a technological burden, there will also be an organizational burden. You'll have to change your processes, you'll have to change your organizations to best adapt to what the technology offers you. There's a lot of worry and anxiety about blockchain. It's viewed as a scary, woo woo, esoteric technology. I encourage you to not be scared, to embrace it, to learn it. Start experimentation, encourage your staff to go after this and figure things out. Build the prototypes that will be applicable to your organization. I think that's the key lesson for all of us around these kinds of technologies.

How do you feel about the name blockchain? Is it the right name? Do you wish we could go back and call it something else?

I don't care. In many ways it's so nerdy, right? Like it describes what it is. A transaction is a block and then you have a chain that locks every single block together. So that's what the blockchain comes from. And so we should not add a marketing veneer to it. We should embrace the nerdiness around the terminology.

All right, we'll find out. Kareem, thank you for coming in.

Thank you so much. This is a lot of fun.

That's Karim Lakhani. He's a professor at Harvard Business School and copy co founder of the HBS Digital initiative. He's the co author with Marco Iancidi of the HBR article the Truth About Blockchain. Thanks for listening to the HBR IdeaCast. I'm Sarah Green Carmichael.