21/03/2018 Blockchain — What You Need to Know

TECHNOLOGY

Blockchain — What You Need to
Know
JUNE 15, 2017

Karim Lakhani, Harvard Business School professor and co-founder of the HBS Digital Initiative, discusses
blockchain, an online record-keeping technology that many believe will revolutionize commerce. Lakhani breaks
down how the technology behind bitcoin works and talks about the industries and companies that could see new
growth opportunities or lose business. He also has recommendations for managers: start experimenting with
blockchain as soon as possible. Lakhani is the co-author of the article “The Truth About Blockchain” in the
January-February 2017 issue of Harvard Business Review.

Download this podcast

SARAH GREEN CARMICHAEL: Welcome to HBR IdeaCast from Harvard Business Review. I’m Sarah Green
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 auto mobile, 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. Karim,
thanks for talking with us.
https://hbr.org/ideacast/2017/06/blockchain-what-you-need-to-know 1/10
 21/03/2018 Blockchain — What You Need to Know
KARIM LAKHANI: Thanks, it’s great to be here.

SARAH GREEN CARMICHAEL: So, what is Blockchain?

KARIM LAKHANI: 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.

SARAH GREEN CARMICHAEL: I might have just done a little bit of that hyping myself.

KARIM LAKHANI: Exactly, so Blockchain, fundamentally, is a ledger. So, a ledger meaning it keeps track of
transactions. Now most ledgers tend to be private. You have your own checkbook that you don’t share with your
friends and family, and 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 the foundational aspect of Blockchain—that in the end it’s a recordkeeping 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 and is core to the way the economy works, a whole new set of applications are now being
thought through because blockchain exists.

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

KARIM LAKHANI: The key element of the publicness is that the transaction is recorded— that something is
transferred between party A and party B. Party A and party B themselves can be anonymous—could be
pseudonymous in a 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.

SARAH GREEN CARMICHAEL: So you have these records that are anonymous and pseudonymous–

KARIM LAKHANI: –Pseudonymous parties, but the records are public.

https://hbr.org/ideacast/2017/06/blockchain-what-you-need-to-know 2/10
 21/03/2018 Blockchain — What You Need to Know
SARAH GREEN CARMICHAEL: Yes, thank you. How does this system confirm the transactions that have
actually happened?

KARIM LAKHANI: This was sort of the genius of Satoshi Nakamoto, whoever he is or they are. That’s like the
mystery part of–

SARAH GREEN CARMICHAEL: –We don’t even really know who invented it.

KARIM LAKHANI: When a transaction is posted on the network between two parties, other nodes on the network
compete to solve a 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 would have to undo every single other prior transaction.
And that proof of work and the chain aspect of the block—a block is a transaction—is chained to all prior blocks,
is what makes this the interesting technological innovation that the Blockchain is.

SARAH GREEN CARMICHAEL: What are the implications of that for who can use it?

KARIM LAKHANI: So 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 as few parties inside of organization, few parties inside of our
ecosystem, or we could go on the public web as well.

SARAH GREEN CARMICHAEL: So when you are talking about these private Blockchains, how might an
organization use something like that to make part of their work easier or more secure or otherwise better?

KARIM LAKHANI: Yes, I think a good example of this is what’s happening in the financial services industry. 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, like 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 securities transfer over– all 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.

https://hbr.org/ideacast/2017/06/blockchain-what-you-need-to-know 3/10
 21/03/2018 Blockchain — What You Need to Know
And then we can do it as a transaction across 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.

SARAH GREEN CARMICHAEL: 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 closer together?

KARIM LAKHANI: Yeah, I think that’s a good way to think about that. In many ways, web technologies, internet
technologies were designed around peer-to-peer connectivity.

SARAH GREEN CARMICHAEL: Taking out the middleman.

KARIM LAKHANI: Taking out the middleman, right. We don’t like the phone companies in the middle. What we
want are the peers to connect to each other directly.

SARAH GREEN CARMICHAEL: We don’t want CD stores. We just want to all share files on the web.

KARIM LAKHANI: Exactly, I love Napster. So currently, the excitement and the explosion is in all the different
things you can do because recordkeeping has now become distributed and is becoming peer to peer.

SARAH GREEN CARMICHAEL: Some people clearly have benefited enormously from these developments, like
Google. Other people have ended up as the kid who has nowhere to sit down when the music stops during a game
of musical chairs–

KARIM LAKHANI: –Like all retail stores.

SARAH GREEN CARMICHAEL: –Like retail stores, record labels, things like that. So when you think about
Blockchain, where do you see potentially some winners emerging and then maybe some jobs that will be
automated are lost as a result.

KARIM LAKHANI: 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 could 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.

https://hbr.org/ideacast/2017/06/blockchain-what-you-need-to-know 4/10
 21/03/2018 Blockchain — What You Need to Know
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 get 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 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, and writing contracts may be up in the air. So we won’t need as many.

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 de novo 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 it opens up a whole new set of opportunities and threats where the existing law profession as well.

SARAH GREEN CARMICHAEL: What about areas of opportunity? 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. While I’m sort of aware that it’s hard to predict where you’ll see areas of growth 10 years
from now, what do you think?

KARIM LAKHANI: Around Blockchain? First is, over the last four to five years, over a billion has been invested
by VCs in Blockchain companies. So 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.

Like 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 efficiency-enhancing applications—
lowering their transactions cause 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. There’s people that are recording them. People that are taking faxes and responding to those
faxes and so forth.

SARAH GREEN CARMICHAEL: It’s amazing that you still have to fax things, by the way.
https://hbr.org/ideacast/2017/06/blockchain-what-you-need-to-know 5/10
 21/03/2018 Blockchain — What You Need to Know
KARIM LAKHANI: Oh, and look at the US health care system. Those will disappear, right? And so we will have
more money for health care because the costs have been lowered. Conversely, we will have this adjustment of the
people that were doing those transaction, heavy friction, heavy task, but now need to be reallocated and retrained.

SARAH GREEN CARMICHAEL: It also seems like organizations always seem to start by chasing efficiency. It
seems the obvious thing to do.

KARIM LAKHANI: Exactly, and 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, the provenance tracking aspects of Blockchain in the
supply chain, I think, is going to be quite interesting. There’s a bunch of start-ups that are trying to do that, and it’s
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 flow of goods on the Blockchain so that, again, is publicly verifiable.

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

KARIM LAKHANI: Yeah, the problem with supply chains is one of trust. I do trust a company saying that this has
been ethically sourced, organically sourced, non-GMO sourced, or without child labor, all those things. And so
you have to actually rely on the brand and the brand’s promise, and you hope that 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 in somewhere in California.

So the notion and the promise of Blockchain is to say, every single transaction, from the sea 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, the 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 a Blockchain, then I should be able to go in and double click and see it all the way
back to its origins.

SARAH GREEN CARMICHAEL: And firms can track it too, right? One of the big challenges for some apparel
companies has been that they didn’t realize their clothes were being made in those conditions. That’s what they say
anyway. The other thing that’s interesting about that is that we’ve talked a little bit about how Blockchain might
take some jobs away, but it seems like if one of the things consumers want is increased transparency in quality and
https://hbr.org/ideacast/2017/06/blockchain-what-you-need-to-know 6/10
 21/03/2018 Blockchain — What You Need to Know
good jobs– to know that the person picking that organic grapefruit is fairly paid, and organic grapefruits might take
more labor to produce– that actually the Blockchain might, in some way, be able to also support better quality jobs
throughout supply chains.

KARIM LAKHANI: Absolutely, 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 in picking the fruit and that transaction is publicly available, then I
can see why it costs me x amount of money, and what the share 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.

SARAH GREEN CARMICHAEL: 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 change the revenue model for musicians and for their labels. So now, some people are saying Blockchain
could be used to help musicians make money again.

KARIM LAKHANI: I think it was Bette Midler who said there were like millions of streams of her songs being
played on Spotify, but she only made like $16 or 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. So Spotify is spending a lot of money giving most of the revenues to the labels, but
labels keep the giant share because the contracts that were signed by artists were geared towards them getting
royalties from the physical goods, not from streaming.

We now see artists saying: I don’t need the intermediary of either 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, I listen to my
favorite AC/DC song a million times. By the time AC/DC gets the royalties for it, it might be months, if not years.

With the blockchain, you could actually make it instantaneously, and that there’s no intermediary in between that
takes a cut from it and also delays the time it takes for the payment to show up as well.

SARAH GREEN CARMICHAEL: 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 a really secure system.
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 figured out how to hack everything else that was ever invented?

https://hbr.org/ideacast/2017/06/blockchain-what-you-need-to-know 7/10
 21/03/2018 Blockchain — What You Need to Know
KARIM LAKHANI: So there have been hacks around Blockchain, more around the endpoints of how people
connect to the Blockchain in terms of the] 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 transactions taking place so far have not
been hacked.

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 many politicians talk about these days. Cracking the system would
require concerted effort by state actors or by people with lots of resources to go after this, almost like a James
Bond type villains 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. You
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. It doesn’t mean those things won’t happen, but it would require
extraordinary effort to do the hacking.

SARAH GREEN CARMICHAEL: So if we are still today in the 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?

KARIM LAKHANI: Yeah, I have fond memories of the squawks and squeaks that my dialup modems did. It was
amazing when I had 24 bauds, then I went to 9,600 bauds. It was just incredible. So several things have changed,
which tell us that the uptake I predict will be faster than will be had in the last 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 small investments so that you can learn. I bet you for senior executives that are listening, there’s a
bubbling up of energy within their organizations amongst their IT groups, amongst their innovation groups,
amongst 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 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.

https://hbr.org/ideacast/2017/06/blockchain-what-you-need-to-know 8/10
 21/03/2018 Blockchain — What You Need to Know
As much as there is going to be a technological burden, there will also be an organizational burden. You’ll have to
change your processes. You 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 this scary “woowoo” esoteric technology.

I’d 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 up prototypes that will be applicable to the organization. I think that’s the key
lesson for all of us around these kinds of technologies.

SARAH GREEN CARMICHAEL: 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?

KARIM LAKHANI: I don’t care. I think you know. In many ways, it’s so nerdy. 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 where the
blockchain comes from. And so, we should not add a marketing veneer to it. We should embrace the nerdiness
around the terminology.

SARAH GREEN CARMICHAEL: All right, we’ll find out. Karim, thank you for coming in.

KARIM LAKHANI: Thank you so much. This was a lot of fun.

SARAH GREEN CARMICHAEL: That’s Karim Lakhani—He’s a professor at Harvard Business School and co-
founder of the HBS Digital Initiative. He’s the co-author with Marco Iansiti of the HBR article “The Truth About
Blockchain.” Thanks for listening to the HBR IdeaCast. I’m Sarah Green Carmichael.

This article is about TECHNOLOGY
 FOLLOW THIS TOPIC

Related Topics: SUPPLY CHAIN

 Loading...

 Loading...
https://hbr.org/ideacast/2017/06/blockchain-what-you-need-to-know 9/10
21/03/2018 Blockchain — What You Need to Know

https://hbr.org/ideacast/2017/06/blockchain-what-you-need-to-know 10/10