While many have little to no knowledge about blockchain technology, it is not an abstract concept. Specifically, this technology presents many interesting potential possibilities and benefits, and thus, it makes sense for construction professionals to familiarize themselves with the concept and keep their eyes open for its possible implementation. This article provides a basic understanding of the technology and its potential impact on the construction industry.

 

Decentralization, hashes, nodes – these are just a few of the terms related to blockchain technology. When taken alone, these terms may conjure up thoughts of high-tech science (or for some of us, a foreign language). It is possible, however, that this technology could be implemented throughout the business world, and ignoring it will not be an option. While one may be timid about blockchains, understanding the basics of the technology does not require learning a “foreign language” or having a high-tech science degree. Instead, the basic principles underlying the technology are relatively straightforward à Block + Chain = Blockchain.

 

What Is Blockchain Technology?

 

A “blockchain,” in its most basic form, is a ledger or database which stores information across a network, rather than storing information in one location on a network. In other words, it is a distributed ledger, which means that the ledger is broadcast across the blockchain network and made available to all participants on the network. Why is this important? Well, whenever a new ledger entry is submitted, the network participants (some of which are called “nodes”) will verify that the entry is valid (or in other words, the entry falls in line and makes sense when compared to prior entries and information on the ledger), and then, if verified, the new entry is added to the ledger. Thereafter, when the next entry is added, the previous information from the first entry is included in the ledger and said information is used by the nodes to validate and verify the second entry. Again, the blockchain is just a simple ledger, but instead of intermediaries doing the validation work, the blockchain itself (through nodes) verifies the validity of each new entry. Thus, in essence, the blockchain continuously reconciles the ledger.

 

The simplest way to explain how blockchain technology works is through an example of a basic transaction. First, the Buyer, who is identified on the blockchain by its own unique digital signature, will attempt to purchase a widget from the Seller. After the Seller agrees to make the sale, the transaction information, including, among other things, the Buyer’s signature, timestamp, and funds that will be transferred via the transaction, is broadcast to the network. Then, the network participants/nodes analyze the transaction details to confirm the validity of the transaction (i.e. by analyzing the Buyer’s history to confirm he/she has the necessary funds to complete the transaction). Once the nodes confirm the validity, the transaction is given its own unique encrypted identifier (its “hash”), and the hash, which includes all of the transaction details, is added to a “block.” After a certain amount of time (which varies by blockchain), the “block,” which includes all of the transactions that have taken place during the time period, is closed and then added to the ledger. The process continues – additional transactions occur and are verified, the transactions are added to blocks, the blocks are closed, and then the blocks are added to the ledger. Thus, a “chain” is created between the prior blocks and new blocks, and the chain will show the entire transaction history on the network. In sum, the blocks are connected and form a chain – the blockchain.

 

Benefits Of Blockchain Technology

 

Why would a business use blockchain technology rather than a simple ledger or database?  There are numerous benefits: it is more secure, it is generally incorruptible, and it provides greater efficiency. With regard to security and the incorruptibility of the blockchain, such characteristics are built into the basic framework of the technology. Specifically, as mentioned above, the blockchain is a “decentralized” ledger where the information is stored simultaneously across the network participants, not in one single location. Thus, if one were to attempt to hack into the ledger and alter the information, the hacker would have to access all of the network participants, not just one location. Moreover, given the blockchain’s protocol (i.e. where each block added to the chain is verified and confirmed as valid based on the prior blocks in the chain), in order to alter the information in the ledger, a hacker would have to modify all prior blocks and information on the chain. Thus, the blockchain is essentially incorruptible.

 

Additionally, blockchain technology allows for an increase in business efficiency, such as its ability to limit the necessity of an intermediary to verify entries. Specifically, given the automatic verification process the nodes complete for new data entries, there is no need for an intermediary to validate each transaction or entry. Further, in conjunction with the general characteristics of blockchains, specific coding can be built into the blockchain network to perform different tasks, including automating payments, scheduling, or supply chain management. These many nuances of blockchain technology are continuously evolving, and as they continue to do so, this technology may have an impact across all industries, including the construction industry.

 

Blockchains In The Construction Industry

 

Before getting into specifics, it is important to note that blockchain technology is in its infancy as it was created less than two decades ago. Thus, it is imperative to understand that the developments of this technology are ongoing, and the list of potential uses will continue to grow as time goes on and new coding and algorithms arise. Nevertheless, there are two examples of how blockchain technology is being used today that could someday have an impact on the construction industry: (1) smart contracts, and (2) supply chain management.

 

Smart Contracts

 

A smart contract is the term used to describe coding that runs in conjunction with the blockchain which sets specific sets of rules that must be met in order for something to occur. In other words, it is a type of computer code based on an “if-then” principal, whereby if something occurs, then something else will occur as a result – just as if you pick a drink from a vending machine and insert the required funds, then the machine will automatically dispense the chosen drink.

 

Smart contract terms (the coding) could be integrated into construction contracts to facilitate any number of things. For example, a general contractor may subcontract with a masonry contractor for the construction of five brick walls on a project. The subcontract could integrate smart contract terms as a clause and refer to the blockchain network on which the smart contract runs. Then, the smart contract coding on the blockchain can set the specific parameters – i.e. the masonry contractor will be paid one-fifth of the subcontract amount after satisfactory completion of each brick wall. Thereafter, once the masonry contractor completes the first wall, it would simply have to enter the code indicating completion onto the blockchain, and then, the subcontract funds would automatically be released to the masonry contractor. Thus, if the masonry contractor completes the first wall and the satisfactory completion code is entered onto the blockchain, then one-fifth of the subcontract funds are released to the contractor. While this is a basic example, it demonstrates the efficiency of paying subcontractors through the integration of smart contracts built on the blockchain.

 

Nevertheless, we know that these types of subcontract transactions do not always go off without a hitch. Accordingly, different types of safeguards could be integrated into the smart contract coding. For example, coding can be integrated for different performance issues such as delay or deficient work. That said, smart contracts are only as “smart” as those who are coding them. As such, one thing to note as smart contracts potentially become more prevalent is that not all scenarios are likely to be accounted for through coding, and thus, it will be prudent upon the contracting parties to understand the potential liabilities of using smart contracts and account for such uncertainties.

 

Supply Chain Management

 

Another potential integration of blockchain technology is in supply chain management. Blockchain technology would be able to provide more detailed tracking information than what is currently available – and this exact type of integration has been studied in many different industries. For example, retail grocers have tested the use of blockchain technology allowing consumers to trace turkey meat back to its original home farm.

 

While the construction industry obviously would not be tracking meat from farm to consumer, one can easily see the benefits of tracking a piece of material from its origin to the end placement on a construction project. In essence, the blockchain would allow for the general contractor (or owner) to track every piece of material used on the project site from its origin, through the shipment of the material and arrival at the construction site, to its final use in the project. Thereafter, if any issues arise with the material, they will be easily tracked.

 

With this in mind and given the numerous industries already integrating blockchain technology to assist in supply chain management, it is possible that such integration will be coming to the construction industry.

 

Conclusion

 

As discussed above, blockchain technology is still in its early developmental stages. Nevertheless, as the number of news stories centered on blockchains increases, along with the growing number of industries and companies testing the integration of blockchains into everyday business, the integration of blockchains into the construction industry is inevitable. Thus, understanding of the technology will be beneficial.