Over the recent years, blockchain has become a mature technology that has created new ways for organizations to share business data and enable process integration with partners, customers, and suppliers. Blockchain has great potential to disrupt existing data exchange methods such as Electronic Data Interchange (EDI). Will blockchain replace EDI? Or is it complementary to EDI? In this post we explain why we believe that blockchain is the future for business-to-business (B2B) integration and which benefits the technology can offer compared to traditional EDI.
Traditional electronic data exchange
EDI already exists for decades and still is the most prominent traditional way for B2B data exchange. Even today the development of EDI-based solutions continues while some people already expected that EDI would have been replaced by API technologies and the HTTP protocol. This section gives an overview of what EDI is, how it evolved over time and summarizes the pros and cons of EDI.
What is Electronic Data Interchange (EDI)?
EDI has enabled trading partners to electronically interchange business information using a standardized format, which replaced paper-based processes to share information with another organization. Common examples of business transactions that are facilitated by EDI are purchase orders, invoices, shipping statuses, inventory documents and payment confirmations.
How EDI evolved over time
EDI started in the 1980s when powerful companies requested, or forced, their suppliers to send data to them electronically, replacing paper-based processes. Over the years many standards have been developed and evolved both for document types (file format, structure and content of an EDI document) as well as transport protocols (communication method and data exchange processes via EDI interfaces). Two important transport protocols are Applicability Statement 2 and 4 (AS/2 and AS/4). Both the applicability statements are a universal method for transporting data. AS/2 was introduced in the 2000s. AS/4 became a standard in 2013, which is a federated model with service providers that allows companies to send business transactions to different organizations connected to other service providers.
Pros and cons of EDI
- Standardization on messaging formats for business transactions
- Documents can be transferred more quickly when compared to paper-based or manual processes
- Processing errors are decreased, as manual processes are more prone to human error
- Expensive proprietary software that requires a risky custom implementation program to start using
- Lack of cross-compatibility between partner companies
- Out of reach for most small to medium enterprises (SMEs)
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The Advantages of Blockchain vs. EDI
Now we understand EDI, it is time to have a closer look on why blockchain technology is relevant for B2B integration. This section gives an overview of what blockchain technology is and what the advantages of blockchain are compared to EDI.
What is blockchain technology?
Blockchain technology has been a trend since the late 2000s and is used to maintain distributed ledgers. Blockchain has proven to be a foundation for trustworthy, accountable, and transparent data- and value exchange protocols. Blockchain is a distributed system which contains individual nodes that communicate with each other to reach consensus on transactions that are executed between parties. Any update to the ledger made by one of the parties involved is captured and recorded by all nodes.
Advantages of blockchain over EDI
Organizations that use distributed ledgers based on blockchain technology benefit from many advantages over EDI. The most important functional and technical advantages are as follows:
- Blockchain technology is open-source software while EDI is proprietary software, which makes blockchain attractive from a cost perspective
- Blockchain provides a single source of truth for multiple organizations without placing trust in one central entity to collect and manage data
- Blockchain doesn’t only support the exchange of documents and data like EDI does, but also enables digital value transfers in a secure way
- Blockchain enables network effects, for example allowing visibility across multiple stakeholders, which creates transparency in value chains
- Blockchain facilitates everything that EDI over AS/4 brings, but cheaper and technologically better
- No central point of failure or service provider model required (compared to AS/4)
- Blockchain-based solutions can still use the standardized EDI messaging formats and therefore make use this important benefit of EDI
- Blockchain automatically safeguards the sequence of the transactions in a particular business process while EDI is one-way traffic and requires functional acknowledgements to be sent back to confirm a message has been received.
- By using smart contracts, data can be exchanged with multiple parties in one go and shared business rules can be applied during transmission
- The risk of losing any transaction is next to none on a blockchain
- The risk of fraud is next to none because ledgers are near impossible to hack
Conclusion: Blockchain or EDI?
To conclude, EDI is a proven technology that has been around for about 30 years; but has now been overtaken by blockchain technology as the superior transmission model. Blockchain technology offers the same benefits when it comes to enforcing a shared messaging standard but brings a single source of truth, immutability and other benefits as presented above. Systems based on enterprise blockchain protocols meet all the conditions that a modern enterprise would ask of an IT system. Therefore, we now can benefit from a superior blockchain-based transmission model for these messages.
EDI still works for peer-to-peer data exchange but lacks benefits that blockchain offers. If you are building a new system from scratch, blockchain clearly is the way to go. If you rely on EDI today, we advise you to modernize your stack with blockchain. In this way, you don’t have to throw away all your expensive EDI integrations immediately but phase it out while moving towards a blockchain-based future.