BLOCKCHAIN – AN OPPORTUNITY FOR DEVELOPING …

BLOCKCHAIN – AN OPPORTUNITY FOR

DEVELOPING NEW BUSINESS MODELS
Assoc. Prof. Nadezhda Filipova, PhD1

Abstract: Over the last years, the blockchain technology has

attracted the attention of both business users and IT specialists. In essence,
blockchain or a chain of blocks is a distributed and decentralized database
replicated across the multiple nodes of a network. Until recently blockchain
has been associated mainly with cryptocurrencies, but nowadays it is
revealing its serious potential as a means of replacing the business models
that facilitate the operations of business organisations and the communication
between them. The utilisation of the advantages provided by blockchain,
however, requires their appropriate interpretations within the framework of
business processes. With reference to this, the article analyses some of the
main concepts and mechanisms of this technology. Special attention is paid to
the interrelation of blockchain and distributed ledger (DLT) technologies,
hashing of transactions and data management through consensus as well as
the so called “smart contracts”. A parallel is made between the capabilities of
public and private blockchain. Based on this, the study defines the
fundamental blockchain characteristics and the advantages resulting from
them. It is suggested that the blockchain technology offers a solution to the
primary problem of trust between people in the context of global
communication and ensures better transparency, reliability and security of
data and business processes. In addition, the author outlines certain potential
technical and business risk that have to be taken into consideration in the
process of data transfer with reference to blockchain.
Key words: blockchain, distributed ledger, decentralized application
(DApp), smart contract.
JEL: C89, O00.

1
Department of “Informatics” , University of Economics – Varna

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Introduction

The blockchain technology – associated until recently mainly

with crypto currencies – is promising today revolutionary changes in
the social and economic infrastructure and is helping to find
solutions to numerous problems in the spheres of business,
government, health care, education and legislation to name just a
few. Kandaswamy and Furlonger (2018), analysts from Garner, the
consulting company, define it as the new paradigm that facilitates
the business and communication between people. The interested
towards this technology is increasing mainly due to breach of trust
in the Internet and online operations: everyday there are
discussions about unauthorized use and compromise of shared
information, including personal details and financial data. Therefore,
it seems that the blockchain technology will be the driving force of
the next generation Internet, namely the decentralized Internet or
Web3.
According to research, conducted by Gartner, however,
despite the interest towards this technology, only 1% of the
surveyed companies actually use it (Technews.bg, 2018). The
widespread use of an innovative technology and the exploitation of
its benefits pose the need for serious changes in the business
models and business processes of its users, as well as in their
information systems and IT infrastructures. Otherwise, it remains an
abstract opportunity that is not put to actual use. This, however,
requires a sound foundation, namely users should be very well
aware of the concepts behind this technology. With reference to
this, the purpose of the author is to outline some of the main ideas
and mechanisms of blockchain technology and its capabilities to
improve the business models and processes of its users. At the
same time, some advantages and potential problems of applying
the technology will be identified and discussed.

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1. Blockchain – DLT relationship

The term “blockchain” (chain of blocks) is used as a modern

word with promises for innovations. Nevertheless, it can be said
that users are not familiar enough with the mechanisms of the
technology. It should be noted that, often, the "blockchain" concept
is linked to crypto currencies or is used as an umbrella term
describing a number of related technologies, including the
Distributed Ledger Technology (DLT). For this reason we will try to
clarify some technical aspects of both technologies and their
interconnection.
First, it should be emphasized that blockchain is a
technology which appeared before bitcoin and the other crypto
currencies and is not invariably related to them. Therefore, it is not
correct to transfer the concerns for cryptocurrencies of some users
to the blockchain technology because it only creates the
infrastructure for their design and use. Technically, blockchains can
exist without the cryptocurrencies but it is a fact that the increased
interest towards them attracted attention towards this technology.
In informatics blockchain is associated with cryptography
and data structures. It is based on the so called “hash tree”, which
is also known as Merkle tree. This data structure was patented
back in 1979 by Ralph Merkle (see Merkle, 1979). It is used for
verifying and managing the amount of data transferred between
computer systems. It guarantees that sent data is not false or
altered during transfer. In other words, Merkle three is used for
supporting data integrity of networks.
In 1991, Merkle tree was used for developing the so called
“secured chain of blocks”. This is a series of records where every
record is linked to the previous one by a cryptographic hash
function. Lafaille (2018) points out that this marks the beginning of
the blockchain technology. In 2008, the legendary Satoshi
Nakamoto developed the chain of blocks concept based on DLT
and it has become the backbone of the bitcoin technology (see

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Nakamoto, 2008). Actually, bitcoin is the first widely used

application of blockchains.
Nowadays, the terms “blockchain” and “distributed ledger”
are often used together and interchangeably but there are
differences in their origin. As Brakeville and Perepa (2018) point
out, DLT is a type of database that is shared and synchronized
between the nodesе of a distributed network, i.e. this is a
distributed database. Transactions referring to exchanging data or
assets, for example, are registered between in it between the
network participants. Each node stores an identical copy of the
register and updates it independently from the other nodes. The
changes are constructed separately by each node but before they
are written in the register the network participants must reach a
consensus, i.e. the changes must be approved by all of them or
the majority of them. To achieve consensus the network
participants must reach an agreement as of changes in register. It
is done automatically with a consensus algorithm (protocol). Bitcoin
networks, for example, use Proof of Work protocol (PoW) to reach
consensus when new blocks have to be added, i.e. for “digging out”
cryptocurrency. When consensus is reached, the updated register
copy is stored in all network nodes. This guarantees the storage of
identical register copies in all network nodes.
With reference to this, it is important to determine the
differences between DLT and traditional databases. Web – based
databases are usually centralized structures, i.e. they have one
management centre. They have a client – server architecture
(Figure 1) and are stored on server(s). In case the server fails, the
databases cannot be accessed. To read and modify them, users
must have rights to do so. Most databases support information
which relevant to a specific time, i.e. screenshot of the data.
Database control is centralized, it is carried out by a database
administrator who gives access rights, ensures the data security
and reliability, etc. In other words, users depend on the database
administrator. Database administrators (or other users with enough

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BLOCKCHAIN – AN OPPORTUNITY FOR DEVELOPING …

rights) could damage or corrupt the stored data, limit the access of
other users, etc. In certain cases, this causes serious problems.

А) Database B) Distributed ledger (DLT)

In case of problems in the In case of problems in any

server, data is not accessible node, data is accessible
тъпна

Figure 1. Traditional database and distributed ledger

DLT has peer-to-peer (P2P) architecture. The participants

have equal rights and exchange information without a server
(Figure 1.B). Each user can create and add new elements and all
participants work together to guarantee the safety and reliability of
information. If one or more nodes of the P2P network fail, the data

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remains accessible. With reference to management, DLT is a

completely or partially (de)centralized structure, i.e. it is managed
by all network participants or authorized nodes. The control and
responsibility for data is shared and is done by achieving
consensus. One of the main advantages of DLT is avoiding the
above- mentioned risks of centralized database administration. In
addition to supporting current updated data, distributed ledgers hold
history data records about previous state and changes done by
network participants.
Blockchain is the functioning distributed ledger and for many
years it has been its only form, which has led to the
interchangeable use of the two terms. However, new alternatives
to the blockchain (and respectively new cryptocurrencies) have
appeared in recent years. This has resulted in higher speed of
transaction processing, improved security and lower costs. For
example, the NANO (RaiBlocks) cryptocurrency is based on block
lattice. This can guarantee approximately 7,000 transactions per
second compared to 3 – 4 ones done with bitcoin (Gvili, 2018). Iota
and Hashgraph utilize a Directed Acyclic Graph (DAG) and permit
500 – 800 and over 250,000 transactions per second respectively
(Schueffel, 2018). But because there is still not sufficient
experience, it is early to conclude whether these data structures are
better than the blockchain technology and whether they will be its
long-term alternative. Therefore, they are not dealt with in this
publication.
With reference to this, it can be concluded that the scope of
DLT is broader than that of the blockchain technology. The
distributed ledger provides to its user a technology for data access,
storage and distribution. The responsibility for maintaining DLT is
shared among all network participants (nodes) that vote to reach
consensus about its current state. Blockchain is only one of the
possible forms distributed ledger can take. This is a data structure,
which allows for organizing the distributed data by guaranteeing its
integrity and confidentiality. DLT, however, supports the utilization
of other types of data structures.

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2. Main blockchain mechanisms

Blockchain is a related list of blocks, which contain different

information (not only cryptocurrency transactions). It allows for
adding new data organized in blocks. Changing or deleting data,
which is already entered in the data chain is impossible.
Hashing plays a key role in building and maintaining the chain
of block. With this cryptographic hash function based on a mathematical
algorithm, input data of arbitrary size is transformed into an output string
of fixed size, also called hash, hash value or hash signature. The
cryptographic hash function has the following characteristics:
 The hash value is easily generated;
 Decrypting, i.e. recreating the initial input data, based on
the hash, is impossible;
 It is impossible to generate one hash value for different
input data, i.e. there is lack of collision.
There are different cryptographic functions. For example, the
bitcoin blockchain uses SHA-256 (Secure Hash Algorithm 256-bit),
which generates 256 – bit (32 byte) hash value. It is usually
represented as a sixteen-digit number, consisting of 64 digits. Every
change, even the smallest one, in the input data leads to changes
in the hash value. Figure 2 shows the hash values under SHA-256
of several spelling versions of “blockchain”.
The block has a header and a body. The body includes the
transactions. Their number depends on the size of both the block
and the transactions. For example, the average size of a block in
bitcoin chains is approximately 1МВ and it can contain more than
500 transactions (see www.blockchaininfo, 2018).
The block header consists of:
 The header hash value of the previous block (parent
block);
 Timestamp showing the current time after January 1st
1970 in seconds;
 Merkle hash root, which is built by recursive hashing of
pairs of transactions and in this way summarizes the hash values of
all transactions in the block (Figure 3).

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 Assoc. Prof. Nadezhda Filipova, PhD

Blockchain 0bf5b3c53e2da83eafd74b401d7b16c4c4a3dd4fa292f81ef491734fe
19c42c8
Blockchain e6c5e23a451f292eff31cb44edc2c89394fbfc5d9d25a85fabde02a4c0
a4db90
Blockchain 625da44e4eaf58d61cf048d168aa6f5e492dea166d8bb54ec06c30de
07db57e1
blockchain ef7797e13d3a75526946a3bcf00daec9fc9c9c4d51ddc7cc5df888f74
dd434d1
BC 768921a22b8e190c2cfafeb0688f0d58a5f76ee4c7fb369758a208c7b
a5e9acb
#blockchain 86edce3cbbd8ac6968c3c854cfe8d25d8ee6be2df52b4beab7622879
ac848108

Figure 2. Examples of blockchain values

(generated from http://www.xorbin.com/tools/sha256-hash-
calculator)

Merkle hash root value

ABCD

AB CD

A B C D

Hash values of separate transactions

Figure 3. Hashing of the Merkle tree of a block with 4

transactions

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Each block uses the hash of the previous block to form its
own hash and this is its unique identification in the chain. This
means that when a single transaction is changed or added in a
particular block, it hash value has to be changed and the entire
chain after it has to be reconstructed. The facts that a copy of the
blockchain is stored on multiple computers in the network and every
change requires consensus make this task (for now!) impossible.
Therefore, it may be appropriate to use the technology for
registering events, processing transactions, managing records and
tracking assets to mention a few.
The evolution of blockchain is related to developing
decentralized applications (dapp, dApp, DAPP or DApp) for
automation of business processes and data processing. DApp are
becoming the new paradigm of programming and are setting new
challenges to software engineers. According to Raval, (2016) it is
possible to utilize them more extensively in the web applications,
which are very popular nowadays.
Actually, the decentralized applications are similar to the
traditional web applications. Their front – end part is developed in
the same way but instead of working with databases, they work with
blockchain, i.e. encrypted data. Their back – end part is executed in
P2P networks instead of by servers. According to the authors of a
“white” paper on the subject, DApp must be open source and
operate autonomously. In addition, there must not be centralized
control on DApp, respectively it must not be proprietary (Johnston
et al., 2015). The application can be adapted if necessary but all
changes must be approved by consensus by users. Therefore, it
must be very well – designed and as well debugged as possible,
before being launched. The decentralized applications differ
significantly from other traditional software applications, which are
offered to users very soon after being developed and have a
shorter development cycle.
One of the simplest forms of DApp, which is widely – used in
blockchain, is the so called “smart contracts”. The concept was
developed by Szabo (1996), but has been implemented in

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blockchain. The smart contract is essentially a code that is

executed upon the occurrence of a condition or combination of
conditions. It is used to ensure that a transaction can be carried out
simultaneously with other transactions, which arise from and are
related to it. According to Voshmgir and Kalinov (2017) the term
“smart contract” is not very good and misleading to a certain extent.
The “smartness” of the smart contract depends on the knowledge
and skills of the people who have written the particular code, i.e. it
remains dependable on the human factor. It must be clarified,
however, that it is not a legal contract and is not legally binding for
those who utilize it.
Due to the different method of organizing data, the chain of
blocks does not have access to external information. However, the
external environment often undergoes changes that must be
registered by smart contracts. These changes can include, for
example, changes in stock exchange quotations, payment terms
and conditions, climatic conditions or occurrence of events such as
receiving payments or making deliveries. Smart contracts receive
information from the external environment through an oracle. This
is a software application, an agent that is external to the blockchain.
It transmits outside information to the smart contract and initiates it
when a set of predefined external conditions happens. In other
words, the oracle guarantees the communication between the
smart contract and the external environment.
The smart contracts have good perspectives in the fields of
finances, logistics, insurance, administrative services, education,
copyright, etc. For example, if two participants in a deal do not
know each other they need one or some intermediaries who will
guarantee the transactions, i.e. a notary, lawyer, bank or the
government to mention a few. The sale of a car or immovable
property can become a debt, an expensive and risky process (in
case the intermediary or partner is dishonest). The role of the
intermediary can also be played by the smart contract. If the real
estate register is based on blockchain, the smart contract can be
used for transferring funds, paying taxes and fees, transferring

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property rights or carrying out any other transaction during the

selling or buying of property. The question, however, is whether
there are legal barriers to the realization of this process in
blockchain and whether clients will trust the technology.
Based on analysis of the main mechanisms of the
blockchain and DLT, we can summarize the fundamental
characteristics of blockchain technology as follows:
 Distributed and decentralized architecture of the data and
applications based on P2P;
 Necessity of consensus for adding data and changing the
programmes, including the smart contracts;
 Hashing of transactions and links between blocks of a chain;
 Data immutability – once stored, data it cannot be
changed.

3. Public and private blockchains

An important aspect of transforming business processes for

work in blockchain is selecting the appropriate blockchain version.
With regard to their ownership, blockchains can be classified as
public and private (Buterin, 2015). Examples of public blockchain
platforms include the ones used by the cryptocurrencies such as
Bitcoin, Ethereum, Litecoin. They are “open”, i.e. they have an open
source code and do not require special access rights, i.e. any user
can join the chain, download the code and run it on their device
thus become a node. The current versions of public blockchains
use mainly the Proof of Work (PoW) protocol and any user can take
part in the vote for achieving consensus, transaction validation and
distributed ledger support. Transactions are transparent (i.e.
anyone can see them), but their owner may remain anonymous or
use a nickname. Everyone can send a transaction in the chain and
it can be added after being validated. In the users’ business
processes, blockchain can play the role of an intermediary in
transactions by guaranteeing their security and reliability, which are

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based on data immutability. It is not surprising, that this form of

blockchain originated particularly from the financial sphere.
A main advantage for public blockchain users is the low
price because it is not necessary to invest funds for developing
infrastructure, maintaining and administering servers. However,
appropriate decentralized applications need to be developed to
automate business processes. The disadvantage of these
blockchains is the fact that large computer resources are generally
needed to support a multi-node infrastructure. In order to achieve
consensus, every participant has to solve a complex cryptographic
problem, i.e. to provide a proof of work. Another potential problem
for business users may also be the "openness" of the public
blockchain because most business processes require confidentiality
of transaction data and participants.
Private blockchains are owned by a single organization or
a consortium of organizations. Examples of private blockchains
include Multichain, Corda and EWF (operating in the financial
sector and energy industry respectively) to mention a few. These
blockchains are “closed” and not every Internet user can join them
and add transactions because the access is administered by the
owner. For this reason, they are called permissioned blockchains.
The right to read transactions may be public or limited by the
owner. Pre-defined network nodes participate in the consensus
process, i.e. there is representative democracy. This speeds up the
validation of transactions and generally reduces their value.
A major advantage and, at the same time, a drawback of
private blockchains is that they are more flexible than public ones. It
can be said that the private blockchain is only partially
decentralized. The blockchain owner can change the rules, cancel,
and change transactions. This is, in principle, contrary to the basic
concepts of blockchain. The fundamental features outlined earlier
are partially implemented but this is needed in some business
processes. For example, the government should have access and
control over certain public registers such as the business, land and
property and public procurement registers to mention a few.
Actually, it would not give up on its control over these registers.

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4. Advantages and potential risks of blockchains

The characteristics and mechanisms of blockchain lead to a

number of benefits for the business processes and data of users
(Hooper, 2018; Treagust, 2017):
 Security. It is due to several factors, i.e. the hashing of
data in the blocks, the links in the chain, the reached consensus
regarding new blocks. This, along with the storage of multiple
copies, makes it virtually impossible to change sensitive data. The
risk of fraud and unauthorized access is significantly reduced.
 Reliability. It is based on DLT and support of chain
copies in all network nodes. A problem in a particular device cannot
affect the executed processes.
 Transparency and tracking. It is determined by the
unchangeability of data, storage of multiple copies and need of
consensus. Data is available to all participants who can track the
movement of goods and financial resources, for example, as well
as any changes in them over time.
 Trust. In blockchain trust is decentralized and is
supported by all participants. According to Voshmgir and Kalinov
(2017), blockchain supports “trustless trust”. This means that
without trusting any of the participants, users can trust the results
from the processing of data.
 Higher efficiency and lower price. Blockchain is a
highly automated, secure, and reliable system that reduces the
need for intermediaries such as banks, notaries or the state in
business processes and this leads to their acceleration. The fact
that blockchains are based on DLT and hashing reduces labour
costs regarding data security and data archiving.
Based on the above-mentioned advantages, blockchains
provide opportunities for improving business processes in a number
of ways. This is done by accelerating and simplifying, increasing the
degree of automation, reducing the number of intermediaries and
paperwork, providing opportunities for audits and data tracking,
minimizing the risks of fraud and errors, reducing transactions

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processing time, implementing innovative payment instruments,

relying on democratic decision – making, etc.
However, in order to make the right decisions regarding the
adaptation of their business processes to blockchain, users must
also be aware of the risks. For the purposes of the study they are
divided into two groups, i.e. technology – related and business –
related risks.
The technology – related risks involve problems with the
reliability of P2P and DLT architectures, algorithms, protocols and
blockchain software. According to authors such as Pang (2017),
there are concerns regarding blockchain security. The distributed
architecture and high number of nodes minimize the risk of
successful hacker attacks. Nevertheless, these threats exist. The
truth is that there are many attempts of breaking the blockchain
systems used by the cryptocurrencies because of their increased
value. However, so far, most of the attacks have been directed
towards service platforms based on cryptocurrencies rather than
towards their blockchain. It is assumed that the quantum computer
can hack even multi – node public blockchains. On the other hand,
however, it can be used for protecting similar systems by
developing and utilizing of more efficient cryptographic algorithms.
The oracle, a service external to blockchain, could also be the
target of attacks with the purpose of failing or changing the work of
a particular smart contract.
The specialists from Forrester question data immutability – a
term, which is not correctly used according to them (CIO, 2018).
They claim that the chain of blocks can be reconstructed in case of
unwanted events, something that can easily happen in a private
blockchain with limited nodes or a branched blockchain. Actually,
this has already been done in the Ethereum blockchain in order to
neutralize a hacker attack.
The fact that blockchain is a comparatively new technology
should not also be underestimated. There is still not enough
experience in the field but mainly there are not well – prepared
specialists who can develop and support the blockchain infrastructure,

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identify and solve problems, and develop DApps, smart contracts and
oracles. Mechanisms for integration with the legacy systems as well
as different public and private blockchain systems are needed for the
realization of efficient business processes.
However, practice shows that the technology – related risks of
switching to any new technology are understandable and sooner or
later solutions for their elimination will be found. Solving the above-
mentioned problems associated with blockchain as well as many other
yet unknown ones are responsibility of the IT specialists.
Business – related risks refer to the fundamental
characteristics of the blockchain technology and their interpretation
in the field of user business processes. Detailed knowledge of
these attributes is important for finding solutions for reengineering
the business processes when they are to be transferred to the
blockchain. For example, the possibility for tracking transactions
(even only their metadata) and securing their transparency is not an
appropriate solution for all business processes. According to
Forrester, „…for most companies, transparency is more a curse
than a blessing…“ (CIO, 2018). In many cases, it is necessary to
protect the confidentiality of information about clients, the deals
they are involved in and their transactions. This is a requirement,
for example, in banks and FinTech companies. It is also necessary
to take into account the requirements of the data protection
directives such as the European General Data Protection
Regulation (GDPR).
When switching to blockchain-based business processes, it is
necessary to interpret correctly concepts such as “smart contract” and
“complete trust”, which often accompany the term “blockchain” in the
media. As already mentioned, smart contracts are not legal documents
– they are software applications which are created by people and
perform the tasks they are designed to complete. Trust is based on
cryptographic algorithms and software and their proper functioning.
Consequently, the human factor cannot be completely avoided.
Adaptation of business processes for blockchain should be
in line with the existing legal regulations. Lawyers have already

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started to deal with these aspects of the technology, mainly due to

cryptocurrencies, and probably certain legislation changes will be
made in the near future. For example, it is necessary to find
answers to certain questions: who takes responsibility in case users
suffer losses due to mistakes in the public blockchains or smart
contracts; how can regulatory authorities receive information from
blockchains in case of crime suspicions without breach of data
about or belonging to other users; can blockchain information (for
example, about ownership of certain assets) be used as evidence
and can it be used as a legal document ( for example, a notarial
deed); can users request deletion of their data in blockchains; is
cryptocurrency a legal payment instrument; etc.

Conclusion

Whether the expectations for blockchain and DLT technologies

are realistic or whether the promised changes will be ubiquitous and
will change “dramatically” our world will be revealed in the future.
Nevertheless, the interest of the technological giants in these
technologies is a fact. Numerous startup companies are making efforts
to establish themselves on the market by developing blockchain and
DLT applications for different activities in different spheres – from
global payment systems to downloading music and scientific research;
from selling valuable objects and works of art to producing organic
products. This proves the enormous potential of the blockchain
technology and the fact that it is developing extremely rapidly.
Consumers, in turn, have to decide when to invest in it and which of
the existing solutions, platforms and blockchain service providers to
trust. It is very likely that those who are late to transform their business
processes for the blockchain technology and to start benefiting from its
advantages lose their competitiveness. Nevertheless, tt has to be
remembered that using blockchain as infrastructure for data storage
and executing business processes may involve certain risks, which
are characteristic of the early stages of every new technology launch,

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namely customer and user mistrust, legal barriers, lack of experience

and compatibility problems with other technologies. Therefore,
decisions to switch to blockchain must be based on a careful analysis
of the mechanisms, advantages and risks of the technology, and the
opportunities for integrating them into the organization’s business
processes.

References
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