[U27] Blockchain: what role does it play in an ecosystem?
Utility applications on blockchains provide key benefits for ecosystem participants
Dear Reader,
This update in Product | Strategy | Innovation covers a key topic within a 3-Part Series on a Health Ecosystem with a broader scope than health care delivery. In the first Part, we provided an overview of a 3-Pillar model for the Health Ecosystem. In the second Part, we covered improving outcomes with Connected Care. This Update provides more context on blockchain technology before a deep dive into Connected Transactions in the third Part of the Series.
El Salvador adopted Bitcoin as legal tender in 2021 and just months later Bitcoin eclipsed a market cap of US$1.2 trillion.
Blockchain technology dates back to the early 90’s when a cryptographically secure chain of blocks was first described. Then in 1998, Nick Szabo described a decentralized digital currency. Satoshi Nakamoto published a white paper in 2008 on Bitcoin. This paper established the leading blockchain model and use case at the time. Nakamoto implemented a blockchain in early 2009 as a public ledger of transactions using Bitcoin. El Salvador adopted Bitcoin as legal tender in 2021 and just months later Bitcoin eclipsed a market cap of US$1.2 trillion. Over the last 3 months, the Bitcoin value per transaction averaged between US$500k and US$2.5 million with an average number of transactions from 200k to 340k per day.
Blockchain technology has also evolved with applications beyond digital currency. The Ethereum blockchain system was described in late 2013 with a white paper by 19 year old Vitalik Buterin. Ethereum introduced the concept of programmable applications in blocks. These were later called smart contracts. Buterin was born in Russia, but later moved with his family to Canada and attended the University of Waterloo. Buterin dropped out of college in 2014 when he was awarded $100k through a Thiel Fellowship to pursue developing Ethereum full-time.
The LinksDAO just raised $11 million to build out the decentralized organization to acquire and operate a golf course in the U.S. using 9,090 NFT memberships.
Non-fungible tokens (NFTs) used to monetize a piece of art and other unique items are an application using the Ethereum blockchain system. Decentralized Autonomous Organizations (DAOs) are another application with Ethereum to provide an alternative to business incorporation for governance and organizing decisions. The LinksDAO just raised $11 million to build out a decentralized organization to acquire and operate a golf course in the U.S. using 9,090 NFT memberships. These NFTs provide the holder the right to buy a membership to the golf course in the future.
Hyperledger is an open-source, vendor-neutral blockchain platform that is hosted by the Linux Foundation. This is the same organization that helped expand enterprise adoption of the open-source operating system known as UNIX. Hyperledger Fabric enables software apps to be added to a blockchain to automate simple rule-based verification of key transaction terms. Use cases for Hyperledger Fabric include documenting the supply chain in the food industry and medical claims processing across a network of payers, hospitals and providers.
In this Update we will cover:
What is a blockchain?
What is a blockchain use case other than Bitcoin?
Is there a blockchain case study in health care?
Blockchains will increasingly play greater roles to drive efficiency, improve quality and reduce cost in ecosystems where many stakeholders provide a range of services, but all need to settle business transactions. This requires stakeholders to operate a network with utility applications to make the base blockchain(s) work. One such ecosystem is a health utility network that includes key stakeholders like Anthem, Aetna, Anthem, Cleveland Clinic, HCSC, IBM, PNC Bank, and Sentara. Avaneer Health was launched last year as a member-based network to scale this particular health utility network among its members. Other members will join as the value of participating in the ecosystem is demonstrated for key applications.
Many positive outcomes are possible as more core business processes transition from proprietary solutions to utility applications across an expanding ecosystem of key stakeholders. Eventually you may end up with industry standards that benefit everyone. UNIX operating systems, ARM microprocessors, mySQL databases, and the Ethereum blockchain are examples of open-source platforms that enable utility applications. And if utility applications provide a common benefit across all users, they likely play a critical role to enhance the viability of an ecosystem. Just like cities depend on utility services like electricity, water, sewerage, telecommunications and natural gas to thrive.
These transactions with utility applications become a forcing function to drive more stakeholders into an ecosystem because of the value they create.
And because of the transaction basis of blockchains, they could play an even greater role in determining the viability of an ecosystem. These transactions with utility applications become a forcing function to drive more stakeholders into an ecosystem because of the value they create. Blockchain adoption is not a cure for cancer, but it could still play a very significant role to improve health outcomes at lower cost with scale across viable Health Ecosystems. And blockchains also enable ecosystems to include unconventional stakeholders if they demonstrate they provide value. One example would be businesses within a community who provided incentives for consumers to reach goals that benefit the entire community at scale.
Background
A traditional ledger refers to a permanent collection of accounts in which transactions are recorded. A company produces financial statements from supporting ledgers. These might include a Sales ledger to record accounts receivable with transactions made by customers to the company and a Purchase ledger to record accounts payable with transactions made by the company to vendors and other companies. A General ledger represents main account types like: assets, liabilities, income, expenses and capital.
The purpose of the General Ledger is to organize and summarize the individual transactions recorded in all the journals throughout a business.
Double-entry bookkeeping records every transaction in an account ledger with a debit and credit to record changes in value resulting from business transactions. A debit entry represents a transfer of value into the account and a credit entry represents a transfer of value out of the account. These ledgers and double-entry bookkeeping form the basis for financial accounting. Journals may be used to record transactions throughout a business, but at the end of each month all journals are totaled and posted to the General Ledger. The purpose of the General Ledger is to organize and summarize the individual transactions recorded in all the journals throughout a business.
One of the byproducts of the financial accounting mentioned above is centralizing the General Ledger to control and consolidate the accounting of financial records and statements. Larger companies might implement Enterprise Resource Planning (ERP) systems, but control is still centralized. Auditing financial statements happens primarily on these centralized systems and requires granting access to these systems.
We will discuss Blockchains more below, but there are 3 key differences in how blockchains differ from the traditional ledgers discussed so far.
Propagation: New transactions originate with one user, but propagate to a network of identical ledgers, without a central controller.
Permanence: All transactions and records are permanent, unable to be tampered with or removed. This forms a single, immutable truth.
Programmability: Many blockchains are programmable, allowing for automation of new transactions and controls via "smart contracts".
1. What is blockchain?
A blockchain is a database distributed among a community of members and to some degree is an accounting technology. All participants work together to maintain the log of entries. A blockchain is an ever-lengthening chain of blocks with data. Each block contains a record of a change or transaction locked in chronological order and secured using cryptography.
Once added, records are in effect permanent and immutable. They cannot be lost or denied. If something is recorded on a blockchain then it’s deemed by users to be true. Group verification removes the requirement for intermediaries. Anyone can access the record to verify that a transaction took place. What may sound unwieldy and rigid is useful for just that reason. The blockchain represents a single, immutable truth.
Each block features:
Block header: information about the block, such as a unique block reference number – the hash. The header also includes, the hash of the previous block and the time the block was created.
Block content: the record itself, for example, information about a transaction. The block acts like a ledger entry for this and other transactions recorded in this particular block.
The chain features:
A sequence of blocks to form a chronological database of transactions shared across a network of computers. Each computer or server is called a node in the network.
Each block contains the reference of the block before it, meaning they link together to form a chain.
Altering the content of the block changes the hash of that block. This impacts previous blocks in the chain and alerts members. This ensures the blockchain is secure.
The chain is formed by a 4 to 5 step process:
Transaction: two parties agree to make a transaction through a sale, transfer of an asset, etc.
Smart contracts (used in some blockchains): A smart contract is a piece of software that sits within a blockchain and acts as the digital contract for the transaction. Data are entered relating to the contract, such as: price, product info, order quantity, delivery date, etc. When the agreed terms are met, the smart contract automatically triggers verification.
Verification: A transaction record becomes a new block with the transaction details, a unique hash and reference to the previous block’s hash. It is the sequence of linked hashes that creates a secure chain between blocks.
Validation: For a new block to become part of the chain, it must be validated by the group via an agreed “consensus mechanism”. See below for more details.
Propagation: Once a block has been validated it is added to the blockchain and distributed to all the members of the network. The transaction is recorded in near real time without the need for a third party and is held in a distributed ledger that cannot be altered.
Consensus to validate a new block:
Consensus mechanisms make blockchains more secure by making it labor intensive to tamper with blocks.
Different blockchains use different consensus mechanisms. One is called “proof of work” – where servers within the network solve a mathematical puzzle derived from the block’s header to validate the record. To change a block would mean solving mathematical puzzles for all of the blocks in the chain. This would take a long time, giving members of the network time to identify the change taking place.
Attributes of a Distributed Ledger:
Instead of having one, centralized single owner, blockchain records are spread out among all users. The advantage of the approach is in using a complex system of consensus and verification to ensure that, even with no central owner and with time lags between all the users, there remains a single, agreed-upon version of the truth.
Each participant in a blockchain (each “node”) keeps a copy of all the historical transactions added to the ledger, and by comparing to the other nodes’ copies each record is kept synchronized.
Unlike traditional ledger systems, there is no node with special rights to edit or delete transactions. There is no central party at all. One case where blockchains are useful is when a trusted central party is either unavailable or too expensive.
2. What is a blockchain use case other than Bitcoin?
Bitcoin is usually associated with blockchain technology. But one of the key attributes of Bitcoin is a design that does not require permission to join the network. These permissionless blockchains, also known as trustless or public blockchains, are open networks. This makes them available to everyone to participate in the consensus process that blockchains use to validate transactions and data. They are fully decentralized across unknown parties.
But many blockchain use cases can be used by an ecosystem of known stakeholders who benefit from a distributed ledger. Such an ecosystem is well-suited for a permissioned blockchain. Walmart was having issues with quality and returned items in its food supply chain. But when an outbreak of a food-borne disease happens, it can take days, if not weeks, to find the source. A system with better traceability could accelerate this process. Walmart worked with IBM to create a food traceability system for its decentralized food supply ecosystem.
Both POC projects worked as designed, but the mango project in particular reduced time to trace the supply chain from farm to final retail sale from 7 days to 2.2 seconds.
Two proof of concept (POC) projects were run to test the blockchain system. One project traced mangos sold in Walmart’s U.S. stores. The other project traced pork sold in Walmart’s China stores. Both POC projects worked as designed, but the mango project in particular reduced time to trace the supply chain from the final retail sale back to the farm from 7 days to 2.2 seconds. Walmart wanted the blockchain technology to be enterprise-grade for its scale, but open-source and vendor-neutral since they work with a large network of suppliers. IBM recommended Hyperledger Fabric, an open-source, permissioned blockchain implementation and one of the Hyperledger projects hosted by the Linux Foundation. Hyperledger Fabric allows components such as consensus and membership services to be plug-and-play. It also supports smart contracts through what it calls “chaincode”.
The mango and pork POCs required Walmart to design new labels and barcodes with key attributes to upload to the blockchain. IBM wrote the chaincode. Suppliers used the new labels and barcodes to upload data through a web-based interface. Once Walmart saw the technology worked with the 2 POC tests, they wanted to expand it and not just within Walmart since it would benefit the whole industry. Walmart brought in other retailers and suppliers to build an ecosystem around what became the Food Trust with Albertsons, Carrefour, Dole Food, Kroger, Nestle, Tyson Foods, and Unilever. Walmart requires all suppliers of leafy greens like spinach and lettuce to use the Food Trust blockchain system. But this blockchain use case also identifies the power of a distributed ledger where competitors saw the shared value of collaborating for the benefit of end-user health anhhd safety.
3. Is there a blockchain case study in health care?
Change Healthcare operates a large health care networks in the U.S. with 900,000 doctors and 5,500 hospitals to 2,200 commercial and government payers. Over the 2017/2018 period, this network handled nearly 14 billion health care transactions and claims worth $1 trillion. UnitedHealth Group intends to acquire Change Healthcare later this year. With such a large stakeholder network committed to different IT vendors, an open-source, vendor-neutral solution is a critical requirement to drive adoption across the majority of stakeholders.
Hyperledger Fabric was determined to be a viable platform to build a POC test, but the question was how scalable it could be to handle the transaction volume. Change Healthcare built the blockchain system and linked it to their existing network. They found the open-source Hyperledger Fabric code efficient to work with and built a working blockchain system in a few months.
The POC test demonstrated throughput of 50 million transactions per day with peak throughput up to 550 transactions per second.
The blockchain system makes claims transparent to authorized users with plug-in interfaces. Every transaction in a claim’s lifecycle, including any changes to a claim, are all securely recorded on the blockchain along with who made them and when. This transforms claims processing to improve lifecycle throughput and transparency across an entire health care network. The POC test demonstrated throughput of 50 million transactions per day with peak throughput up to 550 transactions per second. This throughput is already adequate to meet the claims processing demands at Change Healthcare, but multiple tools are available to improve throughput even further.
Claims processing is a key blockchain use case in health care due to the volume and complexity of these transactions. Identity management, provider credential verification, pre-authorization and eligibility are other key use cases in health care. Patient medical records have also been proposed for blockchain to provide patients more control over who has access to medical records and for how long. Supply chains for the pharmaceutical and medical device industries also provide other key use cases in health care.
Conclusion
Blockchain as a concept has existed since the early 90’s, but has only emerged in practice since 2009 with use of Bitcoin as a cryptocurrency. The distributed ledger provided by a blockchain makes digital currency a key use case for the technology. Blockchain gains attention as the number of transactions per block and average transaction value for Bitcoin continue to grow. Ethereum is also attracting a large number of software developers who are building applications on top of the Ethereum blockchain system.
Many companies like Aetna, Albertsons, Amazon, Anthem, IBM, Kroger, Nestle, PNC, Unilever and Walmart are attracted to the benefits provided by blockchains. Walmart determined tracing a food product from the point of sale all the way back to the farm with traditional methods required 7 days, but with its Food Trust blockchain, only 2.2 seconds were required. Change Healthcare demonstrated they could process 50 million transactions a day to process medical claims using blockchain.
Walmart and Change Healthcare indicate companies will likely see the value of key blockchain use cases to address bottlenecks in their businesses.
A key attribute of blockchain is the transaction nature of a distributed ledger. Transactions are the data flow for business. Bottlenecks are bad. Efficiency, speed and lower cost are good. As key blockchain use cases emerge to enhance transactions, more developers will focus on building solutions for other use cases. Walmart and Change Healthcare indicate companies will likely see the value of key blockchain use cases to address bottlenecks in their businesses.
But the most important attribute of blockchain deployments over the next few decades will be the forcing function the technology creates for companies to collaborate on core processes as utility applications in a shared ecosystem. But this will take time. Blockchain today is probably where the internet was in its evolution around the mid-90’s where technology was searching for killer applications. The validated, distributed ledger provides a single source of truth and transparency across all transactions. The ecosystems will strengthen over time as each utility application improves, more applications are added and more key stakeholder companies join the ecosystem to gain its benefits. Everyone wins including the end-users these companies serve.
Happy New Year!
Best,
Stephen
I’m long AMZN and IBM mentioned in this update. Nothing in this post is intended to serve as financial advice. Do your own research.