HR Management & Blockchain

Alex Hughes a,*, Andrew Park b, Jan Kietzmann c, Chris Archer-Brown a

Abstract Blockchain technologies are benefiting from significant interest in both societal and business contexts. Cryptocurrencies like Bitcoin have grown rapidly in user adoption over the past 8 years. However, blockchain technologies, which fuel cryptocurrencies, have the potential to extend to other business applications even more profoundly. Blockchain can be leveraged to drive innovation and increase efficiencies in new domains–—including digital arts management, supply chains, and healthcare–—but there remain technical, organizational, and regulatory head- winds that must be overcome before mass adoption can occur. In this article, we provide a brief history of blockchain and identify some of the key features that have enabled its popular uptake in the world of cryptocurrencies. We discuss how blockchain technologies have evolved from traditional software and web technolo- gies and then examine their underlying strengths and evaluate new, noncryptocur- rency use cases. We conclude with a look at the limitations of blockchain and present several important factors for managers considering blockchain implementation within their organizations.

In 2003, Jeff Bezos took the stage at a TED event to compare and contrast the digital zeitgeist with

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other periods in American history (Bezos, 2003). He spoke of the California Gold Rush–—the run on land and mines in California in 1848–—which created a social frenzy around the notion of gold prospecting, business, escaping the rat race, and simply having a go at entrepreneurship. Bezos also observed how the origin and implementation of electricity started with one clear, small goal: to provide light within homes and streets. Remarkably, a number of cot- tage industries evolved into the consumer electron- ics industry, which currently contributes $2.9 trillion to the global GDP (Persistence Market Research, 2017). Bezos used these comparisons to highlight his thinking in the context of the nascent internet and Amazon. He believed that society had only scratched the surface of the web’s capabilities, and that the best was yet to come.

Bezos was clearly right. In the 16 years since his presentation, Amazon has grown and innovated its offering to a near trillion-dollar market cap, pro- viding goods and services that have far exceeded the original scope of the Amazon vision to become “Earth’s biggest bookstore” (Cakebread, 2017). In other areas, too, technology has made dramatic strides toward integrating into social and organiza- tional lives, providing the kind of utility that we had only previously imagined within science fiction. Artificial intelligence (Kietzmann, Paschen, & Treen, 2018), virtual reality (Farshid, Paschen, Eriksson, & Kietzmann, 2018), the Internet of Things (Robson, Pitt, & Kietzmann, 2016), and robotics (Wirtz et al., 2018), to name a few, are starting to become normative experiences, disrupting the ways in which we consider business challenges and retain our competitive advantage in the market. In the same way that Bezos saw the early development of electricity as the foundation for something with greater potential, we would like to append the same sentiment to the topic of blockchain and how it can provide exponential value to business operations.

The benefits and utility of cryptocurrency are

relatively simple to explain and understand, as are their implications for the financial services industry. However, with the promise of lowering costs, in- creasing process efficiency, and the changing importance of intermediaries, the underlying block- chain technology has significant potential to disrupt all sorts of business operations. At this relatively early stage of blockchain applications, these changes and their organizational implications are far harder to analyze or predict and, as a result, blockchain technologies and their potential impact are difficult for managers to understand. This con- fusion has led to frustration within the business community over how and if firms should incorporate

blockchain developments in order to create or re- tain competitive advantages within their respective industries. In this article, we hope to dispel some of the confusion by first explaining blockchain princi- ples and then outlining its benefits and some of its organizational applications and realities for mass adoption. We then discuss technical and societal challenges and managerial implications before we consider what the future might bring for blockchain.

Between 2007 and 2008, the world was plunged into turmoil by the financial crisis–—a man-made chain reaction of financial collapses built on bad debt and even worse administration, the likes of which had not been seen since The Great Depression. During a period of emergency mergers and bailouts, the world witnessed the fragility and instability of a tightly interwoven, highly leveraged, global finan- cial system that appeared to be failing quickly. In response to these events, in October 2008, an un- known person identifying himself as Satoshi Naka- moto published a white paper to a cypherpunk1 mailing list (Nakamoto, 2008), introducing the world to the topic of blockchains by outlining the benefits of an electronic cash system called Bitcoin. To date, Bitcoin and other cryptocurrencies are arguably the most commonly recognized use case of blockchain and, as such, are a suitable basis with which to explain the operating principles of the technology.

Blockchains have been described in various ways. The most generally accepted definitions are that they are distributed public ledgers (Kim & Laskowski, 2018; Zhao, Fan, & Yan, 2016) or a metatechnology: technologies made up of several technologies (Mougayar, 2016). Blockchains are ex- actly what their name suggests: a ledger of trans- actions, or blocks, that form to make a systematic, linear chain of all transactions ever made. While the blocks themselves are highly encrypted and anony- mized, the transaction headers are made public and not owned or mediated by any specific person or entity. The headers are publicly available to those who would like to scrutinize transactions, as long as they have the wallet information details, also known as the hash, available. Every time a new transaction takes place on a blockchain, a new

1 Activist advocating widespread use of strong cryptography and privacy-enhancing technologies as a route to social and political change.

Figure 1. Blockchain timestamps and immutability

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Prev_Block: 00..0000

Transaction 1

Transaction 2

…

Prev_Block: 00..e26f Transaction K+1 Transaction K+2

…

Prev_Block: 00..e26f Transaction K+1 Transaction K+2

…

Source: Kanig (2018)

block is resolved by a miner–—an individual in the network whose job it is to verify each operation.

In the case of Bitcoin, miners create new blocks and add them to the chain on the network every 10 minutes by solving cryptographic puzzles; this process is known as proof of work. The new blocks include immutable timestamps, which provide a proof of work of what has happened before. Time- stamps and immutability ensure that the chain of transactions cannot be tampered with as each se- quential block references the prior block. Simply put, blockchains are tamper resistant since earlier blocks in the chain validate the transactions up to the present moment. If prior block information does not validate, the new blocks cannot form new parts of the existing chain and are rejected. As a result, a transparent and distributed accounting ledger of every transaction ever made on the network en- genders trust (see Figure 1). Blockchains are ex- tremely robust and less vulnerable than traditional IT infrastructures to malware and attacks from hackers.

Since the release of the Nakamoto white paper and the subsequent launch of Bitcoin, it has evolved into a de facto blockchain currency (cryptocurrency) and trading instrument with a market cap of over

$100 billion. In this context, cryptocurrencies–—the built-in currency of the blockchain payments and transactions–—are native to the technology (Mougayar, 2016). However, not everything about the underlying blockchain is new, and many benefits are derived from established technologies.

Blockchains are novel combinations of multiple computer engineering paradigms that have existed for decades. For example, a fundamental feature of a blockchain is secure transaction signing by each party that wants to send another party digital mon- ey, as in the case of cryptocurrencies. This mecha- nism relies on the interplay between hashing algorithms (e.g., SHA-256) and the provision of private and public software keys to each participant in the blockchain network. Private and public key modules (e.g., GPG, hashing algorithms) have ex- isted for over 20 years.

Distributed databases have been a well- researched problem in computer science for several decades (Lake & Crowther, 2013). Even today, trusted databases with distribution capabilities like MongoDB and PostgreSQL suffer from lost data and inconsistent reads or writes due to network disrup- tions, power failures, data races, and more. While blockchains do not currently have the scaling capa- bilities of traditional distributed databases, they have proficiently addressed the issue of inconsistent data writes using artificial rate limiting through its consensus algorithms. Put another way, by insisting that parties who wish to write to the blockchain ledger spend resources and time to solve computa- tionally intensive hash problems, the blockchain network buys itself time to properly order these parties before committing writes from any of them. The trade-off here is that writing to a blockchain is much more resource and time intensive than writing to a traditional database, but it is offset by the advantages in write consistency and uptime.

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The combination of hash algorithms, private and public keys, and the decentralized ledger is what makes blockchains powerful in modern internet architecture. Parties that wish to take part in a transaction do not even need to know each other’s identities but they can be assured that the intended party is the sender/receiver, since only the in- tended party has access to his/her own private key. These parties can also be reasonably assured that committed transactions will be written in the correct order. Moreover, the parties can be confi- dent that their transaction histories will never be lost or corrupted, even if one party defects from the network, as long as the network has a large number of participants.

Blockchain technology is unique in that is does not require a large central server to store and maintain data. As long as the network achieves consensus regarding what transactions happened in the past, the network collectively acts as a server to host the data. If one rogue participant decides to modify previous data, the network majority will quickly outvote him/her. Even cloud computing is not truly decentralized, as servers for cloud com- puting providers like Digital Ocean, Linode, and Amazon host data placed in designated physical and central locations.

To consumers, the specific promise of blockchain is manifold, mainly based on the fact that peer-to- peer systems do not require intermediaries or third parties; transactions can occur intelligently be- tween sole parties. In the context of cryptocurren- cies, tamper-resistant blockchain solutions can prevent ‘double-spending’ and ensure that trans- actions are debited from one account and credited to a different account without the risk of the same funds being allocated more than once; since mone- tary transactions are made between individual par- ties, they reduce concerns around trust placed on financial institutions. The resulting efficiencies mean that costs and transaction times can be re- duced significantly.

Organizations also see the benefits of blockchain. In many parts of the world, hyperinflation has deci- mated local economies and digital currencies have been introduced to stabilize the economy; Ecuador, Senegal, and Venezuela are three such countries that have already adopted digital currencies, either wholly or in part (Heathman, 2017). In other parts of the world, Japan, Estonia, India, and Sweden are investigating methods by which they can adopt

digital currency given the decline in use of tradi- tional notes and coins (Catalini & Gans, 2016; Mason, 2017). As of this writing, the Bank of England is researching ways in which a digital currency might be introduced into the existing banking system to complement the pound (Bank of England, 2018; Meakin, 2018).

It is important to note that, even with decentral- ization, blockchain is not immune to data corrup- tion or network attacks. If the number of participants in a blockchain is low, a coordinated group of malicious parties can create enough nodes to produce a network majority, forcing mutated data upon the rest of the benign nodes. A partici- pant who loses and inadvertently gives up his/her private key through a phishing scam, for example, hands full control of their stored digital assets to the hacker. However, the assumed benefits of the block- chain to consumers and organizations have created much excitement in business circles, far exceeding the specific context of cryptocurrencies. Block- chains can also be logic-based transaction platforms in which digital representations of items of value (e.g., car, house, holiday, code for unlocking a door) can be written into so-called smart contracts, as seen in the Ethereum blockchain. Here, transac- tions can be processed by code instead of simply being recorded and stored permanently within the blockchain, ensuring transparency for all transac- tions–—all without the requirement of intermediar- ies. The potential applications seem limitless, as “any transaction, product life cycle, workflow, or supply chain could, in theory, use blockchains” (Takahashi, 2017).

There is no shortage of use cases for blockchain adoption that promise to protect firms’ business dealings, manage assets differently, prevent theft, simplify and speed up organizational processes, reduce errors, and remove the necessity for third parties. Opportunities arise everywhere and, in this section, we point to some of the most compelling blockchain applications.

Exploitation of the technology is evident in a num- ber of business communities, including startups and intrapreneurs, whereby the disruptive potential of blockchains is driving innovation within business modeling and value propositions (Magretta, 2002; Nowin´ski & Kozma, 2017). As a development plat- form, the blockchain provides a bedrock for new

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sets of software applications that are decentralized and cryptographically secure. As open source soft- ware, most blockchains are open to development from everyone, which will encourage incremental innovation and further improve the robustness of the blockchain ecosystem. The removal of third- party intermediaries combined with convergent solutions such as IoT and AI is driving competition, driving down costs, and lowering barriers to entry.

For governments, the potential for blockchain adoption is equally compelling, with a variety of use cases that could aid and protect democratic principles. Land titles in developing countries have long been an issue for citizens; a large number of registries were lost due to lack of ownership proof. In Honduras, blockchains are being used to guaran- tee that land rights are digitized, ensuring conse- cutive governments cannot strip land owners of what is rightfully theirs by successive dictatorships (Lemieux, 2016).

In the context of voting, individual citizens’ de- tails could be stored in blockchains to guarantee that voting is executed lawfully and foreign govern- ment influence could be mitigated since the poten- tial for vote tampering would be marginal. A malicious party cannot cast a vote on behalf of another individual because each individual has a unique private key that only he/she can access.

The music industry has a long history of unfair practices and nefarious contract agreements that have always favored the labels (Gopal, Sanders, Bhattacharjee, Agrawal, & Wagner, 2004). Musical blockchains are disrupting this power by giving back the control, ownership, and distribution rights to the artists themselves (Dickson, 2016; Lyubareva, Benghozi, & Fidele, 2014). Since the digital revolu- tion of the 1990s, consumers have also been able to reproduce and download albums and songs without moderation on a peer-to-peer basis, highlighting the issues and flaws in current IP, copyright, and licensing laws. This has given rise to a remix culture (Lessig, 2010), meaning modern technology and infrastructure have allowed consumers to copy, edit, and redistribute original digital content with- out any meaningful repercussion or with little re- gard to legal and moral considerations (Kietzmann & Angell, 2014).

On a musical blockchain, the balance of power would be given back to the artist; hash representations

of their music could be written into a block with a unique ID and metadata including ownership and li- censing rights. This means that the content could not be misattributed easily unless the artist allowed it. Payments could be made using a digital currency and the artists could control the way that they distribute or sell music. Different rates could be given for different population segments (e.g., students and the elderly would receive huge discounts; Dickson, 2016; Tapscott & Tapscott, 2016).

Supply chain management is a $16 trillion sector with large overhead in terms of costs, error han- dling, fraud, and administration (Boucher, 2017). Blockchain is ripe to disrupt this sector, especially when synthesized with an IoT strategy. The promise of a blockchain/IoT approach is that many of the issues associated with supply chain handling can be eliminated or drastically enhanced, thus reducing overhead significantly. This works by ensuring each party with a private key writes a confirmation to the blockchain that they have received a product. This secure chain of custody allows for high confidence verification of where and how a product was han- dled, and allows each member of the supply chain to identify and inspect where any mishandling might have occurred.

The granularity and information that IoT and blockchain promise has given rise to companies such as Provenance, Smartlog, and Everledger, which offer transparency services, tracking, and prove- nance of everyday goods (Montecchi, Plangger, & Etter, 2019). While this may seem overzealous, provenance can be crucial to certain industries that rely on evidencing the source of goods, and to consumers who want to ensure companies align with their personal values.

An example of this would be diamond supply, for which the provenance of stones is integral to the underlying value of the stones (Iansiti & Lakhani, 2017; Tapscott & Tapscott, 2016). Ordinary consum- er goods such as clothing, meats, wine, seafood, and postal services are also affected by documen- tation issues; while proving the authenticity of goods is one aspect of their appeal, many compa- nies are finding that blockchain gives them a com- petitive advantage with consumers who are increasingly concerned with the origin of goods sourced from around the world (Armstrong, 2016). The promise of this type of use case in driving the circular economy is significant because it pro- vides consumers with information on the reused/ recycled components in the products they buy.

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Finally, blockchains can protect consumers from deceptive counterfeit fraud. By registering the ini- tial purchase onto a blockchain, the authenticity of the product can be permanently stored and the ownership of the certificate can be passed along in a transaction that can be managed through smart contracts. By connecting the physical product with the blockchain via the use of an IoT device such as a sensor, the connection between the product and its authentication certificate is locked.

In the energy sector, companies are currently de- veloping blockchain solutions to disrupt and diver- sify their operations models entirely. Prosumers who produce their own energy via solar can now sell any excess reserves of energy back to the market using blockchain-powered apps. This step provides value to consumers who care about the provenance of their energy source and supplemen- tal income to prosumers.

Our current healthcare system is plagued with in- formation siloes and inefficient data interchanges between electronic health record vendors, pro- viders, insurance companies, research organiza- tions, and patients. The fax machine is still the primary mode of patient health data exchange due to factors like organizational bureaucracy, pro- vider apathy, misaligned incentives, and inertia (Withers, 2018). Moreover, inconsistent and unse- cure data storage has led to massive breaches of patient data from large healthcare entities globally (Pierson, 2017). This led to significant public back- lash and mistrust in the way patients’ data are stored, interpreted, and potentially sold without their knowledge. Because of inefficient data shar- ing, physicians have incomplete pictures of pa- tients’ health profiles, which leads to slower treatment and poorer health outcomes (Wicks et al., 2010).

Blockchains have the potential to revolutionize the way health data is stored, handled, and effi- ciently exchanged between healthcare entities while maintaining these entities’ incentives. For example, after a patient receives a lab result, the data–—instead of being stored centrally on the lab’s servers–—can be stored encrypted on the blockchain network.2 The data itself can be tagged

2 Or, to comply with privacy laws, stored off-chain with a referent to the data on the blockchain.

with the creator of the data (i.e., the lab) so any parties who access data in the future can see who generated it. This allows for the preservation of commercial incentives for the lab as they will still be able to bill insurance companies and receive funding based on their work. However, the control of the data is now given to the patient, who can actively decide to share it with a new family doctor or send it to a university for research purposes. This reduces concerns surrounding lost or corrupt data, slow exchange of data, and unknown reselling of data. Many blockchain-based healthcare startups like Doc.ai and Encrypgen have already developed decentralized health data solutions.

There is little doubt that businesses, governments, and central banks are all considering the broader implications of absorbing blockchain technology into their respective operations, but the future of blockchain and cryptocurrencies is contentious as of this writing (Kietzmann & Archer-Brown, 2019). Many academics and observers agree that they have much potential (Pazaitis, De Filippi, & Kostakis, 2017; Takahashi, 2017) but the scope of their use- fulness is still moot.

Comparisons about the roadmap to full maturity have been aligned with the developments of the early web; many academics (Swan, 2015; Zhao et al., 2016) see the evolution of blockchain in three decade-long iterations in which each iteration faces its own unique technical and business chal- lenges to larger adoption (Figure 2). For example, in the case of cryptocurrencies, we are seeing wild fluctuations in market value as users are more

Figure 2. Roadmap of blockchain adoption

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interested in exploiting market returns than using them as a medium of value exchange. We have entered the age of smart contracts in which block- chain is being used as a decentralized, programma- ble logic platform. However, most smart contracts are still comprised of programs to create new cryp- tocurrencies. Regulation and organizational accep- tance are still in its infancy and will need to open up dramatically before blockchain is used more broad- ly in any application. We have not yet come close to this stage. Despite the feature-based merits of blockchain, it still faces many technical and societal barriers.

We are currently living through the first iteration of blockchain: cryptocurrencies. However, it is the sec- ond and third iterations that offer the most promise for disrupting business paradigms, processes, and economic impact (Swan, 2015; Zhao et al., 2016).

In order to advance the progress of developing blockchain adoption toward future iterations of development, various obstacles need to be over- come. First and foremost, there are a wealth of technical challenges to consider that mostly involve developing and nurturing the ecosystem required to support maturity and wider adoption (Wang, Chen, & Xu, 2016). The issues are various and require research and input from developers, startups, soft- ware engineers, venture capitalists, and users to solve issues such as secure transactions, interoper- ability between blockchains, and endless scalability (Mougayar, 2016).

Moreover, a large proportion of society does not yet understand what blockchains or cryptocurren- cies are or how they can use them. This means that there will be an impetus on the blockchain commu- nity to lobby for the technology within their own communities and beyond. If blockchains or curren- cies are going to be adopted within business oper- ations and society generally, then there is a lot of work to be done to simplify and demystify these concepts and usage for colleagues, consumers, and critics. This will clearly take time and evangelists within the technology space will need to provide leadership and vision in order to produce the next generation of killer apps to whet consumer appetite.

The development of a killer app would clearly expedite the route to wider adoption if it caught the imagination of the public at large. One such development that aligns with this idea is the recent announcement by Facebook CEO Mark Zuckerberg that Facebookwill beginto research decentralization

and cryptocurrencies for the company as part of his personal challenge: “I'm interested to go deeper and study the positive and negative aspects of these technologies, and how best to use them in our ser- vices” (Zuckerberg, 2018).

Other challenges facing blockchain adoption are questions relating to legal issues and regulation (Boucher, 2017). While the pace of technology is fast moving, regulation and lawmaking are slow- moving processes. This has been evidenced within the fintech industries, which have taken a progres- sive approach to evolving technologies such as dis- tributed ledger technologies, algorithmic trading, and the potential of peer-to-peer transactions. The Financial Conduct Authority in the UK currently holds a technology-neutral stance on the adoption of blockchains in finance and considers their future usage acceptable “as long as risks are acknowl- edged and mitigated” (Clarke, 2018). In the U.S., Jay Clayton, Chairman of the Securities and Ex- change Commission, has taken a hardline stance that all cryptocurrencies are securities and should be regulated as such, imposing stringent oversight on new blockchain projects (Higgins, 2018).

Hopefully, we have adequately illustrated the poten- tial of blockchains and digital currencies to add utility to business, society, and the web. It isa lot to consider and, for managers wondering about implementation, there are potential risks as well as benefits to ac- knowledge. In terms of guidance as to whether a blockchain solution is suitable for the business, there are a number of decision models available. Each offer differing guidance about the appropriate conditions for implementation, including Meunier’s (2018) tongue-in-cheek model (see Figure 3).

Figure 3. Managerial bias toward blockchain

Source: Meunier (2018)

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Clearly, Figure 3 is not a serious illustration of whether an organization should think about adopt- ing blockchain; however, it is an illustration of many managers’ current thinking and bias against block- chain. A more appropriate way to think about adopting blockchain is to consider organizational problems in need of solutions and how these sol- utions could be found in blockchain technologies.

For managers thinking about using a blockchain solution, several important considerations should serve as the bedrock of their decision-making pro- cesses.

Trust: Resolving a lack of trust between parties in an ecosystem is arguably the most important benefit of the blockchain. Notions of trust oper- ate along a broad spectrum and there are a number of ways in which blockchains solicit trust between stakeholders in various exchanges. Most notably are the removal of intermediaries be- tween cash transactions, which is the current model of digital currencies but could be adapted within any intermediary business model (e.g., peer-to-peer auctions, insurance, banking). Be- cause of the implementation of consensus algo- rithms and cryptography, parties in a network can interact and transact with each other relatively safely and with assurances that their transactions and identities will not be stolen or corrupted.

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High uptime requirements: The decentralized nature of blockchains ensures high uptime since they do not have a single point of failure.

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Immutability: If a business requires an immuta- ble, chained log of transactions, then a block- chain may be a suitable solution for future auditing purposes.

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Transaction speed variability: The speed of trans- actions can vary depending on which blockchain is used. If slow transaction times are reductive to the stakeholder experience, then a blockchain solution should be evaluated more carefully, since different blockchains operate at different velocities. Examples of currency blockchain times vary from between seven transactions per second (TPS) in the case of Bitcoin to nearly 3,000 TPS, in the case of EOS (Williams, 2018).

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Managers wear many hats within their role, and part of that role includes nurturing innovation and finding operational efficiencies that benefit the business. In this context, there is an argument for managers to think about blockchain beyond the realms of the decision model and to take a position of innovation

and creativity that contributes to the evolution of the company via process and business modeling innova- tion (Morkunas, Paschen, & Boon, 2019).

It is clear that blockchain technologies are still in their infancy and a lot of their promise still lies within speculation and hyperbole. Much of this speculation appears to be fueled by the ongoing and polarizing debate that questions the utility and value of cryptocurrencies and how they could com- plement existing fiat currencies.

Clearly, blockchain has a long way to go before it matures to become an integral societal product, though there are pockets of implementation within various areas of business. The use cases detailed in this article speak to the potential of the technolo- gy and give a view of what a blockchain future could look like. Just like the early web, it appears that the success of blockchains and digital curren- cies will depend upon the business communities’ appetite to disrupt and embrace the way that we transact value. Furthermore, it will require a lot of heavy lifting by the blockchain community to develop the tools and infrastructure required to nurture a vision of the web that advances society, culture, technology, and business, just as Jeff Bezos did.