Blockchain application levels

Patterns in blockchain applications

After looking into blockchain for a while, you start to notice a pattern in the uses of blockchains. There are simple uses of the blockchains, that can function as add-ons to existing processes, and more complex uses that aim to replace or even disrupt existing processes. This article shows the different uses of the blockchain and gives you a guideline on how to gradually increase the role of the blockchain in your processes.

The main distinction between uses of the blockchain is the amount of domain knowledge the blockchain has in your application. It can go from fully domain agnostic, where it knows nothing about the domain, the entities in the domain or the business logic of the domain, to fully domain gnostic, where the blockchain defines has full knowledge on everything that happens in the domain.

Six levels of blockchain use

Based upon the need for domain specific knowledge, we can define six levels of blockchain use:

  1. audit trail – completely domain agnostic
  2. track & trace – adds entity identifiers
  3. transaction log – adds transaction information
  4. transaction process – adds process knowledge
  5. transaction system – adds business rules
  6. transaction ecosystem – adds governance structure

Audit trail

The audit trail is a basic application of the blockchain that stores a hash value calculated from a file, message or document. At any later date, the hash for a document can be recalculated and the blockchain can show whether the document is unaltered and when this document has been added to the blockchain. The document itself can travel freely, any person getting the document can check the originality of the document against the blockchain. This removes the need for protecting the document itself, because any change in the document will break the link to the original entry on the blockchain. This solution makes it transparent which documents should exist, even though the solution in itself doesn’t store the documents and documents may not be retrievable. Using the blockchain as an audit trail is especially useful in situations where there are multiple actors, for example in the case of decentral registrations or long chain processes. Another use is for documents that have a legal status, such as diploma’s, passports, contracts, where the blockchain can easily verify authenticity of the document.

Track & trace

The track&trace function adds a little bit of information, generally the identifier of the object and/or subjects involved in the transaction. This information makes it possible to track transactions involving a certain object or subject. This way, the blockchain can also implement a kind of basic notification service, notifying parties of transactions involving subjects or objects they are interested in. This function is especially useful when the information on the transaction itself can’t be shared because of commercial or privacy concerns.

Transaction log

In situations where parties can share information more freely, it can be useful to add more information on a transaction to the blockchain. Technically, this information can be stored on the blockchain itself or in a subsidiary storing mechanism closely linked to the blockchain itself, like IPFS. This makes it possible for parties to respond directly to the information in the transaction and creates information symmetry between all parties involved: everybody has the same information at the same moment in time.

Up to now, we’ve considered functionality that can be built using basic blockchain systems, at most extended with closely attached storage facilities. The remaining applications will use blockchain in combination with smart contracts. Smart contracts are pieces of code, that contain business rules and that can be used to execute processes or validate transactions based upon information stored in the blockchain or subsidiary systems.

Blockchain transaction process

Using smart contracts, we can define processes on the blockchain. A process essentially a sequence of actions, that are governed by rules defining what has to be done in an action and what the next action is. Using smart contracts we can create a transaction process that orchestrates the activities of multiple parties that work together in a process. The smart contract defines who must do what and when. The smart contract can also define who has access to what information at any moment in the process. This application of the blockchain can remove friction and increase privacy in processes, especially when multiple parties work together in processes in a network structure.

Blockchain transaction system

One step further is to augment the blockchain with knowledge on how to approve transactions, creating a blockchain transaction system. By adding more business rules to the smart contract, we can create a system that can automatically validate transactions. This increases the speed and reliability of the system, but decreases the flexibility of the system.

Blockchain transaction ecosystem

When we have a fully automated transaction system, it is possible to transfer the governance of the system to the community or eco-system that uses the system. The system becomes autonomous and can support a function in the community with the need for a central authority to execute this function. This is a blockchain ecosystem. The advantage of such a system is its independence of centralized institutions, the downside is that a system without central control can be slow to react to problems within the ecosystem.

Start with the first two levels

In general, the first two levels of blockchain (audit trail, track&trace) can quite easily be added to existing processes and systems and can have considerable benefits when used in larger networks of actors. The third and fourth level (blockchain transaction log & process) can change the way a network of actors works and can greatly reduce friction in a process. At this level, object and subject identity and standardisation of information becomes important and currents systems will be changed or replaced. These problems are tougher to solve, the benefits of creating a frictionless process can be big.

The fifth and sixth level (blockchain transaction system & ecosystem) have more disruptive power, but also far fewer areas of application. At these levels, the system should have full information on everything relevant to transactions, which is hard to achieve for anything but the most simple of transaction. Decentralised governance may be tempting to some, but also has downsides with respect to be able to adapt quickly to change or threats.

Find the business value

My expectations is that in most areas, blockchain use will evolve from level 1 to 4 and will stop there. In some areas level 5 or 6 blockchains can be useful for (part of) the transactions.

When starting the use of blockchain in a domain, look at level 1 or 2 uses first. The can be achieved with current technology at relatively low cost and effort. When applied correctly, they can create business benefits and increase the support for level 3 or 4 initiatives.