Blockchain Technology In The Construction Industry

9and gain competitive advantages in the market andprovide better service to clients and users as well.Blockchain technology is another of theserevolutionary technologies. Numerous consultantshave recognised its potential to change industries,business models and operating processes; such aspayment settlement, accounting, administration,supply chain, customer relations, funding, etc7.The conversations have begun to find out which areas(industries, operating processes, etc.) are the mostprominent candidates where blockchain technologycan add value, increase transparency and effectiveness.In every business one of the most valuable andintangible assets is trust. It has many levels withinan organisation, between the management and theemployees. But equally it is an integral part of anydeal between the organisation and its partners orcustomers.As a general approach this trust was enabled by thirdparties and intermediaries who ensured the contractedparties that they have the authority, transparency andlegal right to do business with each other. However, thisapproach on a fast-paced global economy with growingcomplexity and volume of interaction is increasinglydifficult. The trust and transparency enabled by thirdparties has become too complex, information is oftenhidden, and it can often be a time consuming and costlyprocess. Furthermore, after the last financial crisis in 2008it became clear that the system was highly vulnerable.Since then the so far guaranteed trust and confidencein established third parties has started to shift towardsalternative solutions.Blockchain is one these types of solutions, as it ensuresa transparent distribution of information across all theparticipants of the network in a way where no oneparty holds overall control of the data. The informationis shared in a pre-defined, unchangeable, almostsimultaneous way. Furthermore, all of the distributeddata recorded on the blockchain is immutable.7 Deloitte Digital, Tech Trends (2018): The symphonic enterprise8 Satoshi Nakamoto (2009): A Peer to Peer Electronic Cash SystemWhat is blockchain?Blockchain is a type of distributed ledger technology(DLT) which was first widely introduced almost tenyears ago as the underlying technology of Bitcoin8. Tounderstand this, we must first familiarise ourselveswith what is a distributed ledger?A distributed ledger is a simple database, but withspecial properties. It is distributed, meaning that thedatabase is scattered around multiple locations in ashared manner. It therefore shares some similaritieswith a typical cloud system or other shared stores onthe internet. But instead of having only one sourcewhere the information is stored with multiple accesses,there are multiple stores (as ledgers) scattered whichare simultaneously being updated. A distributed ledgeris also a network in which each participant can interactor transact between one another in a peer-to-peermanner. This direct exchange of information betweenthe interacting parties is enabled by the highly resilientnetwork protocol or consensus mechanism of the DLTwithout the need of any intermediaries.These interactions are then cryptographically securedand added to – and in the case of a blockchain system- an immutable chain of records.As an example, just imagine a system where instead ofhaving one central accounting book of all transactionsbetween contracting parties (a); there is a systemmaintaining multiple records simultaneously by everyparty (b).There is, in its place, just one single source ofinformation or single source of truth (immutablerecords of transactions, interactions) on the blockchainmaintained by the network and its protocol - copiedand shared with all parties who interact on thenetwork.

10Centralised (a.) and distributed (blockchain) record keeping (b.)a.)b.)Accounting/separate recordkeeping byeveryone basedon centralledgerAccounting/record keepingbased onBlockchain asa distributedledger for allparticipantsBy the encryption these transactions included in theblocks are incontrovertible. Moreover, as every blockof the blockchain contains elements/ informationof the previous blocks of the chain, an extremelyresilient trusted record is created. If one would like tomodify one block, the whole chain needs to be alteredwhich cannot be done without controlling the vastmajority of the network. This is the same system as theblockchain of Bitcoin, which has no central authorityand its public blockchain network has been extremelyresilient against attacks since its inception in 2009.and complex supply chain. For example, the Crossrailproject in London, with more than 700 varioussuppliers just from the UK, or the Burj Khalifa, withover 12,000 workers from more than 100 countries onsite at the peak of its construction. To manage such anextended supply chain, keep track of work in progress,schedule, cost and payments, enormous effort andresources are needed. On top of these challengesconstruction projects experience different forms ofmistakes, delays and accidents at various stages andto varying degrees. The lack of accountability in theconstruction industry has been an ongoing issue fordecades and with extremely squeezed profit margins,firms are poised to find ways to cut corners anddeflect blame from the resulting failures.Why blockchain is important for theconstruction industry?The construction industry has regularly been citedas one of the world’s most fragmented, high impactsectors. The best examples for this phenomenon areall those capital infrastructure projects around theworld which have a highly fragmented, scatteredThese are exactly the main “pain points” and areaswere blockchain can help and make the process moreefficient, transparent and accountable between allparticipants involved in the project.There are potential blockchain applications which

11have already been introduced and had influence onthe economy. Some of them can be directly applied tothe construction industry and some of them can serveas a basis for a more tailored application for capitalconstruction projects.The report is distinguished into three main parts withregards to the potential applications:n Payment and Project management;In the first section a more transparent way of initiatingpayments and managing construction projects isdescribed. Secondly, we will explore how blockchaincan bring a new level of traceability through itsimmutable record keeping nature and accountabilityto project procurement. Lastly, the connection and thepossibilities of blockchain together with BIM is probedto unlock the long-waited effective collaboration inthe industry.n Procurement and Supply chain management;n BIM and Smart asset management.Blockchain enabled features for the construction industryTRANSPARENCYTRACEABILITYCOLLABORATIONAlong these three main features of “transparency”, “traceability” and “collaboration”, this innovativetechnology has already offered many competitive advantages. Now the onus is upon us to decide how it will beleveraged in our industry.

12Understanding Blockchain& Smart contractsBefore we dive into the potential use cases of blockchain in the construction industry it is worth exploring thetechnology and how it developed from the double entry bookkeeping system invented in the Middle East in the11th century to the distributed ledger technology.202510.11. Just in the UK itself there are more than 260related companies headquartered based on a recentstudy by Digital Catapult12.In the early 1960s the Electronic Data Interchange (EDI)system emerged to automatically share ledger databetween parties in order that transactions could berecorded by all parties without the input of a human.Whereas EDI shares transactions between independentledgers, with the invention of distributed ledgertechnology, participants in a blockchain network canwork from the same ledger. That ledger is then sharedand validated in its entirety. In this way, blockchain has awide-ranging potential for a new way of doing business.In recent years, various projects have been initiated toleverage the advantages of different distributed ledgertechnologies with regards to the financial industry,logistic, healthcare, insurance, identity management,media services, data sharing and digital dataauthenticity. Some of these projects work purely on thebasis of distributed ledger technology used as a sharedand tamper-proof data sharing system. Whereas othersfunction as a platform or a payment solution, which ispowered by blockchain with a cryptocurrency used asan exchange of value within the platform.The mainstream attention and hype has largely beenassociated with these cryptocurrencies. To date thereare over two thousand various related cryptocurrenciesinvented and currently listed 9. However, this is just thetip of the iceberg, and as promised, this report aimsto distinguish the extremely volatile cryptocurrencymarket to the technology of distributed ledgers andblockchain which underpins most of these digitalcurrencies. Cryptocurrencies are just one way of usingblockchain technology. This innovative digital systemitself is an emerging market with a potential to growsomewhere between 8.7-12.5 billion business by“The technology behind Bitcoin couldtransform how the economy works.”The Economist (31/11/2015)Blockchain in operationBut let’s see then how blockchain works through asimple example of a transaction. First a transactionis initiated between two parties (1). This transactionthen is created as unique data and broadcasted to thewhole network waiting for validation (2). During thevalidation, among other things, it is checked whetherthe sender/ receiver are appropriate and that thesame transaction was not initiated twice. After theconsensus of the network, the validation is done, andthe hashed transaction information is included in a“block” creating a tamper-proof record (3). Then theblockchain is updated with the new block and in thisway the whole network has their own up-to-date copyof the blockchain as well (4). Finally, the transaction isconcluded, the transferred digital asset, data, or order,etc. is received with the immutable record of its originand the fact of the transfer (5).9 Listed cryptocurrencies on coinmarketcap.com on 11 November /2018.10 BusinessWire (2018): Global Blockchain Market 2018-202411 Markets Insider (2017): Global Blockchain Technology Market worth 12.48 Billion by 202512 Digital Catapult (2018): Blockchain in Action - State of the UK Market

13Transaction on the blockchainA1B2ID ##34BID ##Within this process, there is no centralised third partyor accountant who can implement any changes tothe ledger without requiring consensus and validationfrom the network. Hence any changes or newtransactions need to be approved and agreed by thenetwork stakeholders (nodes).The mechanism of sharing data and associateimmutable uniqueness to information is only possiblewith strong cryptographic techniques. This enablesthe embedded algorithm on the blockchain to becertain that transactions are not duplicated. The copiesof the blockchain at every node in the network areidentical and simultaneously updated. Permissionsand accessibility to data is also granted. Inevitably,in order to enable trust in the data recorded on the5Transaction proposedbetween A and BNetwork validation ofthe proposed, identifiedtransactionValidated transaction isincluded on the blockchain asa new blockBlockchain is updated,transaction details are securedTransaction is executedblockchain, it has to ensure unprecedented security aswell. Nothing can demonstrate it better than the factthat Bitcoin’s public blockchain system has never beenhacked in its almost ten years of existence.Now imagine that every key stakeholder of aconstruction project is part of a blockchainempowered network. In this way the governance ofthe network is based on the consensus and agreementof all stakeholders.Each participant would have their own, but same,copy of the blockchain, which includes everyinteraction and transaction between the parties.Regardless of whether this information is privateor fully enclosed for each stakeholder, interactions

14and transactions are recorded, tamper-proof andcryptographically signed. This creates an easilytraceable record of the past about every businessinteraction of all stakeholders. In this way, complexityof project control and the risk associated with it couldbe reduced significantly, and by as much as the costof administration. Even smart contracts (self-executingconditions which can be embedded in blockchainbased systems) can be employed to increase furtherprocess efficiency and traceability. With such asystem, trust and collaboration would be improvedfundamentally between all participants.Collaborative project ntractorDesigners and consultantsPublic and private blockchain typesThese functionalities are employed in mainly twotypes of blockchain system: public blockchains, inBankwhich anyone within the network can participate(e.g.: Bitcoin network, Ethereum) and private orpermissioned networks, where the participants areknown and listed (e.g.: Hyperledger Fabric, Corda).Public and private blockchain typesPublicPrivate Anyone can join and transact Only defined members can join and transact All transactions are public and anonymous Transactions are public and confidential There is transaction fee Transaction fee can be eliminated Relatively slow network Fast network Difficult scalability Highly scalable Very resilient to hacking Resilient to hacking Hard to implement system changes Easy to implement system changes Consensus is incentive driven Consensus is based on permissions

15The key difference is that the public networkparticipants would need to be incentivised in orderto run the network and validate transactions. As anexample, in the case of the Bitcoin blockchain, everynode competes to validate new transactions and addthem to the blockchain. They do it, because once eachnew block is completed and broadcast to the network,the node who implemented the new block is rewardedby new bitcoins and also from the transaction fees. Thisprocess is also known as ‘mining’, where new bitcoinsare created during the validation process.As the network is public and anyone can be a part ofit, it also entails a high level of decentralisation, whichmakes the network highly resilient against hacking,but also relatively slow and hard to implement entiresystem changes.Conversely, the permissioned network is a morecentralised solution in the sense that the governanceof the network is driven by the members, who areknown and validated participants in the network.In this way, the incentive can be eliminated as theparticipants are incentivised to keep the network upand running based on their business relation.For example, in the case of a construction project,the client and the contractor originally have differentinterests in their business relation, hence both of themwould be granted the permission to run validationof transactions as nodes of the network. In this wayneither of them would have the intention of allowingthe other to conduct any wrongdoing.One example is the Hyperledger Fabric networkby the Linux Foundation, which is an open sourcepermissioned blockchain solution. In its development,IBM was a main contributor and created one of the firstBlockchain as a Service (BaaS) solution for enterprises13.Hyperledger Fabric is an example of a PermissionedBlockchain, where each network carefully governswho can participate and what they can do within theblockchain. This contrasts with other open-endednetworks such as Bitcoin and Ethereum that are opento all, but which require the resource intensive ‘Proofof Work’ during ‘Mining’, to validate transactions asmentioned earlier.Similar platform type solutions include Corda14, whichis a distributed ledger platform developed by the R3, aconsortium of around 200 firms and institutions15.Smart contracts on the blockchain toenhance efficiencyThere is a key innovation which was brought tolife by blockchain technology, the so-called smartcontract. It is basically a digital contract, which canexecute its terms automatically when the predefinedconditions are met. One of the first blockchain relatedapplications was on the Ethereum platform16 whichhad the ability to execute computer codes and scriptson the blockchain. As the input conditions came fromthe blockchain as immutable dat, and the code itselfwas also secured on the blockchain, such conditionalfunctions acted as digitally binding contracts.Smart contracts are one of the most excitingopportunities presented by blockchain technology,because through them a wide range of processes canbe improved, automatised and eventually becomemore effective.Let see a hypothetical example; at a constructionsite every labourer who enters the site passes itsID card for security, health and safety reasons. Theinformation about who entered and how much timethey spent on site working is captured and registeredon a blockchain enabled distributed ledger betweenthe client, the consultant and the contractor. In thisway there is no additional administration needed tovalidate this information, as it has already been loggedon the blockchain. Based on the agreed terms with13 IBM Blockchain Platform (2018): Technical Overview, Updated March 201814 Brown, R. G. (2018): The Corda Platform: An Introduction, Updated May 201815 Clark, J. (2018): Blockchain Initiative of the Year 2018: The Nominees. Financial News. Dow Jones. Retrieved 26 April 201816 Buterin, V. (2013): A Next-Generation Smart Contract and Decentralized Application Platform, Ethereum Whitepaper. Retrieved 03 Sept. 2018.

16Smart contract governed site working hours register and payment systemLabour enters site,ID verifiedWorked hours areregistered on theBlockchainBlockchain as singlesource of truth for everypartiesSmart contractinitiates paymentregards to the number of worked hours on site, asmart contract can initiate payment and send paymentcertifications for all parties if needed16.a reverse transaction can be easily initiated. The greatadvantage is that all these interactions are tamper-proofand transparent for the business participants.In this way there are no back and forth queriesbetween the different stakeholders to compare theregistered hours in their separate ledgers. It hasalready been done based on the blockchain enabledsingle source of truth, which is distributed andupdated for every party involved in the process.An important aspect of such a smart contract enabledprocess is that often, external parties or sourceof information need to be involved as well. Thesecollaborators, also called oracles, ensure the link betweenthe smart contract and the process it manages.This example is fairly simple, but the advantages of sucha blockchain system is obvious. It can be scaled up in away that the execution of payments, submissions andproject updates are completed automatically makingthe whole process more effective.Nevertheless, in this way all data and informationregistered (like the number of hours) and transactionsinitiated (e.g.: payments, project updates sent) arealso logged on the blockchain, making the wholesystem transparent and traceable for the collaborativeparticipants. If any mistake occurs, as a clause in thesmart contract with the agreement of all parties involved,In the previous example such oracle, collaboratorsystem was the ID registering gate, which ensuredthat the exact person is identified with the time whenentering or leaving the site. A collaborator can also bethe engineer on site who signs that a piece of workhas been conducted with the right quality, or differentsensors installed on site.The key challenge is to make a system as tamper-proofas the blockchain itself, because if the data registered iscorrupted, inaccurate decisions can be made. Therefore,as the advent of the IoT is closer, such interconnectedsensors can serve as a closed data source for smartcontracts, eliminating the potential human errors.Sensor

the new technology, break down its complexity and see the viable and applicable potential of blockchain technology, to help the construction industry become more effective, collaborative and transparent in the digital age. This insight report aims to put the industry on the same page, with regards to blockchain and distributed