Interest in blockchain technology has soared due to the explosion in the market value of cryptocurrencies. However, there is still limited understanding of how this technology works and what use cases exist outside of Bitcoin and dog memes. If you don't know, the latter refers to Dogecoin, a meme cryptocurrency created as a joke that reached a peak market value of $85 billion (no, that’s not a typo!). In this newsletter, we will provide a brief summary of blockchain technology and a short summary of use cases for FE&S, which we will expand on in future editions.
What is Blockchain Technology?
Blockchain is a database technology that makes it possible to build applications where multiple parties can record binding interactions directly, without the need for a trusted, central authority to oversee.
First principle of blockchain is that it is decentralized, which refers to the dispersion or distribution of functions or powers across multiple parties or entities. In blockchain the distribution of power is key in achieving a “trustless” environment.
Immutable ledger aka “the blockchain”
On its own, an immutable ledger is a sequence of transactions or contracts that cannot be changed or undone. In blockchain, the ledger is a transactional log (immutable and append-only) that keeps a complete record of the entire history of data changes. Each committed transaction is independently verifiable and a copy of the entire ledger is maintained on each node of the network.
Self-executing contract with the terms of the agreement between parties being directly written into the software. When the preconditions of the agreement are met, the smart contract will execute so that all participants can be immediately certain of the outcome, without any intermediary's involvement or time loss. This can include immediate transfer of ownership of assets (property, currency, etc), or the creation/activation of a new task/step in a process.
How is it different from traditional databases?
Traditional databases are centralized under a single authority’s control. They do not keep a detailed history of the data records and allow for data to be modified or deleted. Full access or transparency to the data is rarely given. Access to the database is provided via a client interface that is filtered to only reveal the data that the centralized authority deems necessary. If the controlling entity’s security is compromised, the data can be altered, or even deleted. This creates a single point of failure and requires a “trusted authority.”
Applications in FE&S
Now that we understand a bit more about blockchain, its core concepts and how it is different then most traditional technologies, let's list some potential applications in the FE&S industry.
Smart contracts can automate the execution of processes based on certain conditions being met. This ensures best practices are followed and timely execution. Since the blockchain database is immutable, every step is recorded for full transparency and traceability.
An interesting example includes powering the review and approval of shop drawings for submittal completion. Once a designer specifies a piece of equipment, they can add it to the blockchain. A smart contract can trigger emails to the vendor to upload the drawings to the blockchain. The smart contract will provision the endorsement policy needed to ensure accuracy (GC, architect & consultant need to sign off). This information is appended to the database as a single source of truth. This ensures that drawings are solicited in a timely fashion and always approved by the right parties to ensure there are no issues during project installation.
Supply chain issues are almost always driven by a lack of transparency and/or a failure of communication, which is solved through blockchain technology. Let's quickly examine the current purchase order process. A dealer submits a PO to a vendor with pricing and a due date. The vendor is receiving PO's from many dealers at any given time. The vendor examines the discount agreements with the dealer to confirm price accuracy and then examines their inventory and supply chain to determine if they can fulfill the order by the due date. Once a PO has been accepted by a vendor, no updates are provided unless manually requested by the dealer.
With blockchain, vendors can maintain a sharable inventory with up-to-date pricing based off dealer agreements. Permissions can be included to ensure dealers only see their price. This provides buyers transparency to guarantee product availability. If the product is not in stock, the dealer can see where they are in the queue and how quickly a vendor is adding gross units to gain comfort their order will be fulfilled. This decreases the probability of price mistakes and unfulfilled orders.
Contracts and Payments
Blockchain technology can facilitiate the process and enforce the rules for an AIA or custom contract. As an example, let's say that payment is based on work completed and the endorsement policy requires photographs and sign-off from the contractor and architect. A smart contract can facilitate this entire process with no human coordination needed and append the results to the database for full transparency and traceability. Deposit or interest requirements could also be provisioned in the smart contract, if needed.
This is similar to contractor payments as rebates are also specified in a contract. Blockchain technology can facilitate the rules and endorsement policies of rebate agreements in a transparent and trustless fashion. As an example, dealers can submit invoices to the blockchain. A smart contract routes this information to the relevant vendor, who is tasked with confirming the invoice has been paid. This triggers another smart contract that calculates the rebate amount owed, which can have it's own endorsement policy before being paid. The blockchain would provide full transparency and traceability in the event of any disputes.
All of these areas are major pain-points for the FE&S industry that can be solved through blockchain technology. We will dive into each in more detail in future editions.