In January 2009, a mysterious person or group of people using the pseudonym Satoshi Nakamoto introduced Bitcoin to the world, ushering in the era of cryptocurrencies.

Over the next decade, interest and demand for Bitcoin (and other cryptocurrencies) soared, hitting the crescendo in December 2017 when Bitcoin had a market cap of over $300 billion, with one Bitcoin trading at over $19,000.

Fun fact: In May 2010, when Laszlo Hanyecz made the first online purchase using Bitcoin, purchasing two pizzas for 10,000 Bitcoin, one Bitcoin was valued at about $0.0025.

In addition to introducing cryptocurrencies to the world, Bitcoin also introduced a new technology that has been generating even more hype than cryptocurrencies in the recent past.

I’m talking about blockchain technology, which is the technology that acts as the foundation for Bitcoin and other cryptocurrencies.

Blockchain is touted to be a revolutionary technology that will have the same impact on how we do business as the introduction of the internet did.

Blockchain technology promises to disrupt a wide range of industries, from banking and finance to digital identity management, real estate and property rentals, insurance, the legal industry, energy, education, healthcare, digital advertising, crowdfunding, accounting, you name it.

With such huge promises, it is no surprise that blockchain technology has been attracting a lot of attention.

It has been discussed as a priority topic at Davos 2018, and a survey by the World Economic Forum suggests that by 2027 – less than a decade away – about 10% of the world’s GDP will be stored on the blockchain.

Within the last couple of years, Google search results for blockchain have exceeded 3.7 million, and there have been over half a million new publications about blockchain.

Interestingly, it seems that people are putting their money where their mouths are when it comes to blockchain technology, making large investments in blockchain.

Investments in blockchain companies have been growing rapidly over the past 3 years. 2017 saw $1.07 billion being invested in blockchain companies.

In 2018, this figure rose to $2.4 billion. By April 2019, $1.12 billion had already been invested.

The amount of money raised through initial coin offerings (ICOs), which are a new investment model specific to blockchain companies, has also been skyrocketing.

Big companies have also not been left behind, with companies like IBM investing over $200 million and dedicating over 1000 staff to blockchain-powered Internet of Things.

While it has been generating a lot of hype, and despite all the promises of blockchain technology, it is still a fairly new technology, and as such, a clear path to success using the technology has not been defined.

Most companies are simply experimenting with the technology without a clear evaluation of the value it offers or the feasibility of capturing this value.

Unfortunately, this means that a lot of these companies will not realize any ROI from their investments in blockchain technology.

Driven by the hype, companies are forgetting that adopting blockchain is more than a technological decision; it is also a business decision. Adoption must be based on use cases that solve actual business problems.

In this article, we are going to take a look at whether blockchain technology offers any strategic business value that warrants major investments in the technology.

First, let’s start by understanding what blockchain technology is.

UNDERSTANDING THE BLOCKCHAIN

Despite all the hype that blockchain technology has been attracting, a lot of people do not have a clear understanding of what exactly the blockchain is or how it works.

Put simply, a blockchain is a database or ledger that is distributed across a private or public computer network.

All the computers within the network hold an updated copy of the ledger, which means that there is no central point that someone with malicious intents can attack to corrupt the ledger.

All the information on the ledger is encrypted using cryptographic protocols and is recorded on the ledger chronologically.

You can think of the blockchain as a Google Doc, only that in this case, it is in the form of a ledger rather than a word document.

With Google Doc, any changes made to the document are immediately visible to everyone with access to the document.

Similarly, any changes made to the ledger are immediately visible to everyone within the network.

However, to prevent anyone from making incorrect entries to the ledger, majority of the computers within a blockchain network have to agree that the entry is valid before it can be added to the blockchain.

This is done using various consensus mechanisms.

Since blockchains do not have a central authority to oversee transactions, the consensus mechanism helps to provide trust within the network and prevent fraud or double spending.

In addition, some blockchains also implement smart contracts, which are basically contracts that automatically execute specific transactions once certain predetermined conditions are met.

Some of the advantages of blockchain technology over standard databases include decentralization, immutability, improved transparency and cryptographic security.

Blockchains allow verification of information and exchange of value on a peer to peer network without the need of a third party.

THE APPLICATIONS OF BLOCKCHAIN IN BUSINESS

It’s good to note that there isn’t a singular form of blockchain. Instead, the blockchain is a broad technology that can be designed in different ways to meet the requirements and objectives of different use cases.

Understanding the different use cases or applications of blockchain technology is crucial in determining the value that the technology offers to businesses.

The applications of blockchain technology can be categorized into two key functions – keeping records and facilitating transactions.

Under these two broad categorizations, we have six other smaller functions that blockchain technology can perform.

The value blockchain presents for businesses depends on the particular function(s) that the business relies on.

Below is a breakdown of the major applications of blockchain technology:

Record Keeping

One of the major applications of blockchain technology is the storage of static information.

Under this application, we have three sub-functions:

  • Static registry: This is where a distributed database is used as a store for reference data. A good example is using the blockchain to keep record of patents or to keep track of food origin and safety.
  • Identity management: This is where a distributed database is used to store identity related information. This is particularly useful for preventing identity fraud and enhancing processes that require identity authentication, such as voting.
  • Smart contracts: This is where a set of conditions are recorded on a distributed database and specific transactions configured to automatically trigger and self-execute once these predetermined conditions are met. A good example of such an application of blockchain technology is the automatic payout of insurance claims.

Facilitating Transactions

The other major application of blockchain technology is the use of the distributed ledger as a registry of tradeable information.

Under this application, we also have three sub-functions.

  • Dynamic registry: Here, a dynamic distributed database is used to keep track of assets, constantly getting updated as these assets are exchanged between network users. A good example of this is fractional investing.
  • Payments infrastructure: This is almost similar to the previous application. In this case, however, the dynamic distributed database is used to keep track of cash or cryptocurrency, constantly getting updated as payments are made between network users. Cross-border peer to peer payments are a good example of this use case.
  • Other: In this category, we have all other use cases that rely on a dynamic distributed database, either those that do not fit into the other categories discussed above, or those that are a combination of two or more of the other categories discussed above. An example of such a use case is initial coin offerings.

Based on an evaluation of the impact and feasibility of the above applications of blockchain technology, there are three key insights on the overall strategic value of blockchain technology and how to capture this value.

The three key insights are:

  • Blockchain does not necessarily have to be used to eliminate intermediaries to generate value. This insight promotes the use of permissioned blockchain-based applications.
  • In the short term, blockchain technology will generate value through cost reduction, rather than by creating new, disruptive business models.
  • The feasibility of using blockchain technology at scale is a couple of years away. This is because there are currently no common blockchain standards, and establishing these common standards will require the “coopetition” paradox to be resolved.

Below, let’s take a more detailed look into these three key insights;

BLOCKCHAIN DOES NOT NEED TO ELIMINATE INTERMEDIARIES TO GENERATE VALUE

Like we already saw, blockchain is basically distributed ledger technology.

Distributed ledger technology can be divided into four main types, each of which is useful in meeting different requirements and achieving different objectives.

These four types of distributed ledger technology are:

Permissionless public systems: This type of distributed ledger technology is public, meaning anyone is free to join the network. The system does not implement permissions, meaning anyone within the network can read, write and commit information to the network. There is no single owner of such a system. These systems are usually hosted on public servers, and are usually anonymous and highly resilient. On the flip side, permissionless public systems have very low scalability. Some good examples of such systems are Bitcoin and Ethereum.

Permissioned public systems: This type of distributed ledger technology is also public, meaning anyone is free to join the network. However, since the network implements permissions, different participants have different capabilities on the network, based on their permissions. Every participant can read the information on the network. However, only participants with special permissions (authorization) can write and commit information to the network. Permissioned public systems have medium scalability.

Permissionless private systems: Since this type of distributed ledger technology is private, only authorized participants are allowed to join the network. Once they have joined, however, anyone can read, write and commit information to the network. Such networks are hosted on private servers, and their scalability is relatively high.

Permissioned private systems: Like the previous type of distributed ledger technology, this one is also private, meaning that only authorized participants are allowed to join the network. In addition, these networks implement permissions, meaning that only participants with the right permissions can write and commit information to the network. Participants without these permissions can only read the information on the network. These networks have very high scalability.

One of the most touted benefits of blockchain technology is its potential to eliminate intermediaries and third parties from transactions, thereby helping reduce cost as well as transaction complexity.

For instance, when launching Bitcoin, Satoshi Nakamoto wanted to get rid of the reliance on Banks and payment processors.

However, it is good to note that eliminating intermediaries and third parties is only possible with permissionless, public networks.

But is this the only (or even the best) way to capture the value of blockchain technology?

The above method threatens the business models of central authorities and dominant players in the market.

However, instead of seeing blockchain technology as a threat, they can still harness it to maintain their positions and grow value.

This will be done by adopting other blockchain architectures, instead of the permissionless, public architecture.

The blockchain architecture that holds the greatest potential for businesses is the permissioned, private blockchain network.

This architecture will allow businesses to reduce costs and transaction complexity without necessarily removing these businesses from the equation.

Since they are private, these blockchains can be developed in commercial confidence. The implementation of permissions will also allow businesses to reap the benefits of blockchain technology while still maintaining control.

In addition, the potential for permissioned private networks is also enhanced by the fact that this type of network is highly scalable, eliminating the scalability challenges networks like Bitcoin have been facing.

A good example of the application of permissioned, private blockchains is what the Australian Securities Exchange is doing.

They are developing a blockchain-based equities clearing system that will result in less back-office reconciliation work for brokers who belong to the exchange.

Of course, this is not to say that blockchain technology does not have the potential to disrupt current ways of doing things by eliminating the need for intermediaries and central authorities.

However, this will need an immense mentality shift and is a bit far off, considering the relative immaturity of the technology and the challenges it is currently facing.

Therefore, the easiest way to generate value from blockchain technology at the moment is to integrate it into current operations without necessarily getting rid of the intermediaries and central entities.

IN THE SHORT TERM, COST REDUCTION IS THE GREATEST VALUE OF BLOCKCHAIN TECHNOLOGY

While blockchain has the potential to bring about new, disruptive business models, its greatest impact, at least in the short term, will come from improving operational efficiency, which will in turn lead to cost reductions.

Of course, the potential of blockchain technology being used to increase efficiency will vary depending on the industry, with some industries being more suited to blockchain solutions than others.

Some of the industries that will capture the greatest value from blockchain technology include financial services, healthcare, and government.

In the finance sector, blockchain solutions will transform and improve efficiency in functions that revolve around the verification and transfer of financial information and assets.

Operations such as cross-border transactions, which are major pain-points at the moment, will be greatly improved by blockchain solutions, since the blockchain is geographically agnostic and reduces the reliance on intermediaries.

Seeing the potential blockchain technology holds for the financial sector, a huge number of banks in North America, Europe, and Australia have already started investing in or experimenting with blockchain technology.

In the healthcare sector, blockchain will improve efficiency in data management and exchange of this data between patients, healthcare providers, researchers, and insurers. First, blockchain based records will improve administrative efficiency.

In addition, blockchain based data will improve availability of historical patient data, something that is necessary for advancements in medical research. In addition, blockchain solutions could also offer patients greater control over their data and its use. For instance, with smart contracts, patients might be able to make money whenever their data is used in medical research.

In government, blockchain solutions will lead to large administrative savings due to improved record keeping, while at the same time increasing transparency of government processes.

These solutions will also improve the sharing of data between government, citizens, businesses, and watchdogs, while at the same time improving security of this data.

Already, several governments have started experimenting with blockchain projects.

As the technology grows, it will definitely create new disruptive business models. In the short term, however, the greatest value of blockchain technology will come from increased operational efficiency and cost reduction.

FEASIBILITY AT SCALE IS STILL A COUPLE OF YEARS AWAY

Highly scalable commercially viable solutions will need to be developed before the strategic business value of blockchain technology can be realized.

Unfortunately, there are a number of challenges that will have to be overcome such scalable solutions can be developed. These include:

Lack of Common Standards: Being a relatively new technology, and considering the fact that blockchain development efforts have been decentralized, there are no clear regulations and common standards in regards to blockchain applications. Common standards will have to be established before scalable applications can be developed. Fortunately, efforts are already in place to help establish common standards that will guide blockchain development, with some global consortiums coming together to develop blockchain platforms for their respective industries. Such platforms will play a great role in establishing common standards for blockchain solutions.

The Technology is Still Young: Blockchain technology is relatively immature and has therefore been facing some challenges that limit its current viability. For instance, blockchains that rely on the proof of work algorithm for consensus are facing scalability issues due to their high energy consumption. Issues like transaction speed are also placing limitations on the scalability of current blockchains. As blockchain technology matures, however, you can expect these challenges that these challenges will be resolved, leading to increased scalability of the technology.

Digitization Of Assets: In order for assets to be recorded and transacted on the blockchain, they need to be digitized. With assets like equities, this is fairly easy. With some assets, however, such as physical goods, there might be need to integrate other technologies – such as biometrics and IoT – in digitizing these assets. Connection of the blockchain to these technologies might create vulnerabilities. For instance, while the blockchain might be secure, an IoT sensor that is feeding data to the blockchain can be easily compromised, thereby compromising the data that is going into the blockchain. Such problems will need to be addressed before these solutions can be deployed at scale.

The Coopetition Paradox: For blockchain use cases to be feasible, critical mass is required. As the network size increases, so do the benefits. However, to achieve the required critical mass and therefore capture these benefits, the network participants – some of who might be competitors – need to come together and agree on some fundamental issues. For instance, in order for a blockchain based banking system to be scalable, different banks might need to come together on the platform. Being competitors, however, they might find it challenging to come to an agreement on various decisions pertaining to this platform, and the more participants there are, the harder it becomes to come to an agreement. For blockchain solutions to be feasible at scale, this coopetition paradox will have to be resolved.

WRAPPING UP

Based on the insights shared above, we can conclude that beyond the hype, blockchain technology will generate strategic value for business.

This will be done by improving operational efficiencies and reducing costs for businesses without necessarily eliminating intermediaries.

Over the long term, blockchain technology will also create new, disruptive business models and revenue streams.

At the same time, it is good to note that the feasibility of blockchain solutions at scale is a couple of years away, owing to challenges such as lack of common standards, the relative immaturity of blockchain technology, issues to do with digitization of assets, and the coopetition paradox.

Still, it is important for companies to start thinking of ways in which they can start implementing blockchain solutions to capture the value this technology offers.

For dominant companies that are leaders in their respective industries, the greatest focus should be on making moves now with the aim of establishing standards and establishing their blockchain applications as the go-to market solutions.

For startups with little or no market share, more focus should be put on utilizing blockchain technology to come up with new, disruptive business models.

Companies that lie in between market leaders and startups should focus on testing various use cases to improve their internal processes and preparing to move fast to adopt emerging standards.

Blockchain Beyond the Hype: What is the Strategic Business Value?

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