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Blockchain in Human Resources – Part 1

There has been a progressive buzz around blockchain over the last half a decade, fueled by the game-changing potential it holds across industries and various business operations, including human resources. Notwithstanding its potential, its adoption has been rather slow across the business, except in its original application of cryptocurrency and perhaps supply chain management to an extent.

It’s partly due to the cost and complexity associated with its implementation, but also due to the fact that as a technology its logic hasn’t been completely understood or perhaps not been adequately explained by its proponents to potential adopters.

We at Workplaceif decided to disseminate knowledge around Blockchain and HR via two parts article. In part 1, we address some straight questions from a user perspective and drill into the fundamental roots of cryptocurrency/ blockchain. We also discuss and briefly elaborate on some of its early adoption in operational HR. We base our discussion around analogies, making it simpler for the end user to understand.

In the next part, we will discuss in more details the how to organize a blockchain “proof of concept” for different HR transnational operations.

What is blockchain?

The blockchain is a distributed ledger similar to a transactional HR database that is distributed across several nodes (participants/stakeholders) on a peer-to-peer (equal rank) network. A  typical RDBMS / NoSQL database/ cloud HRIS database like SAP, workday may be a centralized or a distributed database system but not a peer to peer, a consensus-based system like blockchain.

The advantage of being distributed is the lack of central authority which delivers the following  advantages over centralized systems such as:

  • More authenticity and trust
  • Faster execution of transactions, and
  • Lower overall cost of the system.

When any transaction gets executed in a blockchain, each node (participant/ stakeholder) gets a copy of the transaction. Each transaction carries a proof of work within a hash code. Special nodes are called as miners. They verify the “transactions” via cracking a hash code for “proof of work”. All miners in a blockchain compete to crack the hash code and the particular miner who solves the puzzle gets paid (in Gas money). Gas also generates new cryptocurrency in the blockchain.

Every solution to hashcode ( proof of work ) or verified transaction results in adding “new block in the chain” and so the chain grows. This is the “circle of life” for a blockchain.

Speaking of cryptocurrency, blockchain simply a synonym for Cryptocurrency/ Bitcoin. Is it true? 

Partially true. The genesis of blockchain is linked to the cryptocurrency implementation known as bitcoin around a decade ago. Now, we have many popular cryptocurrencies such as Ethereum (an open source leader), ripple, litecoin – all are public blockchains. 99% of production use cases of public blockchains are powered by cryptocurrency since miners who run the engine of any public blockchain need to be paid an incentive. Also, in this concept, the “proof of work” is likely to be replaced by “proof of stake”.

Private block chains may not involve paying cryptocurrency incentives to miners, however, there is an ongoing debate whether such a non-peer-to-peer permission / restrictive system fulfills the technical parameters of blockchain in the first place.

Moreover, the long-term econometrics, investment, and sustainability of a closed and permission blockchain in production are still questionable. IBM hyper ledger is a leader in this space.

Is cryptocurrency a real money or a bubble, or a Ponzi scheme?

Cryptocurrency is a real money, like any other currency. Incidentally, no definition of real money in economics can be found except commodity money i.e. gold and silver.

“Currency, also referred to as fiat money is generated, circulated and guaranteed as a medium of goods/services exchange by the federal banks of respective nations. The value of a currency and the total national currency in circulation is based on complex macroeconomics.”

On the other hand, cryptocurrency is generated via establishing “proof of work”. i.e. cracking a hash and generating new blocks in the blockchain by miners. Each new block generated, adds more cryptocurrency to the system. Unlike fiat money, cryptocurrency is trans-national.

Mining in a blockchain verifies:

  • The legitimacy of a financial transaction
  • Avoids double-spending of cryptocurrency, and
  • It creates new units of cryptocurrencies by rewarding successful miners.

Of course, both cryptocurrency and fiat currency are susceptible to rapid change in valuations and speculation.

 

What wizardry generates cryptocurrency? Does it mean that cryptocurrency is simply a  reconversion of fiat money?

Partly true. Fiat money/ commodity money does power the engine of cryptocurrency. Cryptocurrency systems cannot exist without fiat money for two principal reasons:

  1. Fiat money/ Commodity money has to be a medium of entry and exit into a cryptocurrency system
  2. Power bills for processing and solving the “proof of work” and generating new bitcoins via the creation of new blocks is paid by fiat money.

Therefore the assumption is true partly. It’s similar to a battery-operated vehicle, where the battery is charged by power generated from fossil fuels. Having said that Cryptocurrency does deregulate money from government control and builds transparency in financial transactions.  That itself is a major takeaway. Cryptocurrency can buy another cryptocurrency.

 

Public Vs Private Blockchains – which type is relevant for HR?

Actually, there are three types of public, private and consortium blockchain.

Public blockchains: A public blockchain has no access restrictions for participants. Any participant can transact and also become a miner. Such networks offer economic incentives to (via cryptocurrency) those miners who create new blocks by solving the “Proof of Work”hash algorithm. Some of the largest, most visible public block chains are Bitcoin and Ethereum. HR recruitment and background verification could be a great fit for public blockchain.

Private blockchains: A private blockchain has access restrictions for participants and miners. An invitation needs to be extended by the network administrators. The intent here is to execute transactions economically and without sacrificing autonomy and running the risk of exposing sensitive data via a public system. Talent Succession planning process or any process with very sensitive data could be on a private blockchain.

Consortium blockchains: A consortium blockchain is often said to be semi-decentralized. It is a permission-based but instead of a single organization controlling it, a number of organizations might operate a node on such setup. The administrators of a consortium chain restrict users’ reading rights as they see fit and only allow a limited set of trusted nodes to execute a consensus protocol.

In HR, recruitment and background verification could be in a public blockchain, appraisals systems in consortium blockchain and very sensitive data like the succession path of senior employees in a private blockchain. It all depends upon specific requirements.

 

Is blockchain relevant for HR? Does HR have a solid business case for its application? What are the areas in which blockchain can be applied to HR?

There is a valid business case for blockchain wherever any sensitive data in any business domain needs to be verified, moved shared or a certain action is taken (based on its verification). Let’s check 6 key prerequisites as defined by IBM in order to check the business case for blockchain in HR i.e. Consensus, Provenance, Immutability, Finality, Process Automation & Speed of transactions.

  1. Consensus: Does the agreement that each transaction is valid across the HR processes (among key stakeholders) provide some benefit? Yes – “Attribute agreement analysis” for recruitment, succession planning, and appraisals, payment rates for vendors.
  2. Provenance: Is maintenance of a complete audit trail important (transparency)? Yes – for ensuring the authenticity of resumes and work expertise tracking, Fairness in the recruitment process and External vendor work and payments
  3. Immutability: Is it important that the train of transactions is tamper-evident?Yes – particularly for making work experience tamperproof, certification and skills assessment. For ensuring fairness in the recruitment process and employee appraisals.
  4. Finality: Is there a need for an agreed “system of record” across the business network? Yes, Synergy of data is critical for operational HR and has always been a legacy pain point
  5. Automation: Are there HR transactional processes that could be automated and preprogrammed, freeing up valuable time and resources? Yes – smart contracts (automation) are relevant for payroll, external vendor payments, transactional work assessment, leave allotment, taxation. This can supplement AI initiatives in the blockchain.
  6. Speed: Would you benefit from transaction resolution in minutes rather than days or weeks? Yes – any operation would benefit for quicker and faster decision making and the same is true for HR too, especially JIT recruitment and onboarding.

 

Is blockchain also relevant for HR data security or is it primarily intended for transparency and trust of transactions only?

Explicitly blockchain is intended to be a distributed database for verification and trust. However, implicitly it also enhances data security via public-private keys required for nodes to access information that is stored in blocks. Like 32 bit layered passwords of centralized database systems, private keys in a blockchain ensure that data is accessible to the intended source only. A private key is derived from the public key. A public key is a hash that represents the “proof of work” which miners must solve.

 

Apart from trust, transparency, and security of the data, can blockchain solve any other HR business problem as well?

Blockchain can deliver HR process automation through smart contracts. It gives a new dimension to the automation via consensus-based smart contracts. A smart contract is a digitally signed, computable agreement between two or more parties who are embedded in the proof of work. Further, it could automate tax deductions, vendor payments, reimbursements to employees etc.

 

Few more real-life examples of blockchains applied to HR processes?

There have been a few discreet experiments using hyper ledger (composer and fabric) for external vendor payments and ensuring transparency in performance appraisals and succession planning. These are private blockchains hence there is a lack of information surrounding its production implementation.

However, a few well documented and published implementations of blockchains have been on open source Ethiruim. Few good examples are Bitjob – a job board and Cvproof – a resume/ credentials verification and tracking. Both these startups deal with the automation and decentralization of the job applicant market.

Conceptually these platforms enable a business to verify the educational qualifications and career milestones of the candidate directly from the concerned institution/ business via blockchain “proof of stake”. Any person having an online banking facility and an internet connection should be able to participate in such systems. Incidentally, bitjob is creating its own cryptocurrency platform, whereas Cvproof is building its application on the Ethirium platform.

Both these blockchain based recruitment/ candidate management systems use the Consortium/ hybrid blockchain architecture and both these advents will need gradually build a critical mass to be profitable, by enabling recruitment agencies to introduce candidates with validated credentials to their clients.

In the next part, we will discuss how to organize a blockchain “proof of concept” for different HR transnational operations.

 

About the authors: 

Raja Sengupta: Head of product development and Principal Consultant at Workplaceif. A Masters in applied statistics with 17 years of experience in statistics teaching, quality control, HR, product development and database programming. His expertise includes analytics, statistical quality monitoring, supply chain, and HR. This included multiple designs of experiments around blockchain too.

 

Manoj Kumar: Founding partner at Workplaceif and a leading practitioner of FoW, HR Tech, and state-of-the-art Advanced Analytics in HR. A thought leader, HR 40Under40 award winner, influencer, blogger, speaker, academician, and an advisor for workplace digital transformation, People Analytics, and future of work. 

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