Public Sector – Decentralized. – Strategy in the Age of Decentralization

With the acceptance of digital modes of communication increasing rapidly, governments have also started to adapt and communicate to the citizens via smart digital channels. A report by McKinsey suggests that government organizations have a lot of value to capture by implementing digital ways of doing their day to day businesses. About $1 trillion can be freed up annually by achieving operational efficiency and increasing productivity.

So, how can blockchain help public sector organizations realize this huge potential? The answer to this question lies in the characteristics of blockchain. To understand this better let’s first look at the key characteristics of blockchain.

Cryptography is the technique that lets different blocks in the network communicate with each other securely. Blockchain uses cryptographic hash to connect blocks in a systematic yet decentralized manner. It also helps maintain the integrity of the data.
Immutability – data in a blockchain cannot be altered and hence helps in auditing the changes in the database.
Data provenance – tracks the origin, changes and over time alteration of the data.
Decentralization – as data is stored in multiple blocks it brings in a lot of advantages such as immutable ledger and transparency of data.
Transparency – as every transaction that happens over a blockchain has the transaction record saved in every node, it is impossible to hide transaction related information from participating entities.

Now let us shift our focus to government organizations and what are some things that public sector organizations look for when undergoing a digital transformation.

Efficient – Budget constraints and lack of right incentives are some of the causes for low efficiency and productivity in most public sector organizations.
Transparent – Working with public sector organizations can at most times feel like interacting with a black box. Once that application has been submitted, there is no way to know how long or when it will be looked at.
Secure – Governments nowadays are responsible for some of the most sensitive data files of citizens and businesses of their economy. Keeping it safe and secure is their most important mandate.
Cost effective – Budget allocations often gets tricky and any cost savings achieved on routine and monotonous tasks can be allocated more efficiently.

Hence, some of the key success indicators of a successful digital transformation project are it’s efficiency, transparency, data security and cost-effectiveness.

How can blockchain help these public sector organizations achieve these four focus areas seamlessly?

Efficiency

Smart contracts find a very useful application when it comes to increasing operational efficiency. Government organizations have service level agreements (SLAs) with contractors to validate the work and initiate payment post successful completion of the task. Smart contracts could make this process smoother by initiating these payments based on the amount of work completed and contract criterions satisfied.

Identity management and access management are some other use cases which can benefit greatly by the implementation of blockchain. Instead of paper based or biometric identification, which is currently stored in one database, decentralizing it makes it easier for organizations to access it and increases the speed of processing an application such as a drivers license or a tax return.

Use case of improved efficiency:

The X-Road project by Estonia – 99% of public services are available to Estonians online. The X-Road project uses cryptographic hash function to link data items and hence data is stored on individual servers which are encrypted end-to-end. This means that data is not duplicated, and different governing bodies can still access it as needed over secure network. Thus, making the experience seamless and faster for both the government and the citizens.

The X-Road project introduction for reference

Transparency

In a typical blockchain scenario, once a transaction has been approved, it is then stored on all the ledgers on the network. This means all nodes in the network are aware and can access some basic information (how much and between which addresses). This property of blockchain makes it transparent and inclusive of all the participants in the network.

This characteristic of transparency makes blockchain a great option for tracking elections, tax fillings and mitigating financial frauds. All the right stakeholders get access to all the relevant data they need in order to objectively determine the fairness and transparency of the government procedures.

Use Case for Transparency:

Malta has implemented a blockchain-based system to store the academic records of its citizens. The advantages are two-fold, job seekers have a secure and reliable system to prove their educational credentials and employers gain more trust and can focus on other aspects of a job seekers profile rather than focusing on getting their credentials validated. This also helps in gaining more trust in the economy both by businesses and their own citizens.

Security

The famous security of blockchain stems from the cryptographic fingerprint which is unique to each block and the “consensus protocol”. Another element that makes blockchain secure is the links between each block, which means every block has the unique hash of its previous block. So, if one entry is changed in a block, a new hash needs to be assigned to every block in the network. Due to this rigorous and time-consuming process, blockchain is considered difficult to hack.

Use Case for Security

Swiss city of Zug has developed a mobile application named uPort that is powered by Ethereum network. In this case the data of an individual is stored on their local mobile phones in an off-chain environment. Individuals can choose to share the data with another entity (the city, a service provider or another dApp). This kind of system has a lot of advantages other than just security such as low infrastructure requirement to store the data, GDPR compliance and scalability to other federal or provincial levels.

Functional explanation of uPort (long version)

Cost Effective

Blockchain has the potential to eliminate investment in redundant infrastructure, increase productivity by letting human beings focus on more intellectually challenging work instead of monotonous paperwork and increase speed of processing applications. This decentralized system also eliminates third party intermediaries which has the potential to reduce a huge chunk of cost and improve the speed of initiatives.

Use case for cost effectiveness:

According to an article by Microsoft, the global tax gap – the difference between what is owed and what government collects – is around $1.6 trillion. The global cost of collection is $1.3 trillion.

The article suggests using peer-to-peer transactions to reduce the cost of third-party tax transaction brokers. It also highlights the use of smart contracts as an automation to collect taxes based on other transactions such as purchases and salary payments.

Thereforce, in my opinion blockchain, if leveraged properly, can help government and public sector organizations meet their mandates within budget and in time.

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