Blockchain beyond the hype: What is the strategic business value? PART I
Companies
can determine whether they should invest in blockchain by focusing on specific
use cases and their market position.
Speculation on
the value of blockchain is rife, with
Bitcoin—the first and most infamous application of blockchain—grabbing
headlines for its rocketing price and volatility. That the focus of blockchain
is wrapped up with Bitcoin is not surprising given that its market value surged
from less than $20 billion to more than $200 billion over the course of 2017.1Yet
Bitcoin is only the first application of blockchain technology that has
captured the attention of government and industry.
Blockchain was a
priority topic at Davos; a World Economic Forum survey suggested that 10
percent of global GDP will be stored on blockchain by 2027.Multiple governments
have published reports on the potential implications of blockchain, and the past two years alone have seen more than half
a million new publications on and 3.7 million Google search results for
blockchain.
Most tellingly, large investments in
blockchain are being made. Venture-capital funding for blockchain start-ups
consistently grew and were up to $1 billion in 2017.The blockchain-specific
investment model of initial coin offerings (ICOs), the sale of cryptocurrency
tokens in a new venture, has skyrocketed to $5 billion. Leading technology
players are also heavily investing in blockchain: IBM has more than 1,000 staff
and $200 million invested in the blockchain-powered Internet of Things (IoT).
Despite the hype, blockchain is still an immature technology, with a market that
is still nascent and a clear recipe for success
that has not yet emerged. Unstructured experimentation of blockchain solutions
without strategic evaluation of the value at stake or the feasibility of
capturing it means that many companies will not see a return on their
investments. With this in mind, how can companies determine if there is
strategic value in blockchain that justifies major investments?
Our research seeks to answer this question
by evaluating not only the strategic importance of blockchain to major industries but also who can capture what
type of value through what type of approach.
In-depth, industry-by-industry analysis combined with expert and company
interviews revealed more than 90 discrete use cases of varying maturity for
blockchain across major industries (see interactive).
Interactive
We evaluated and stress tested the impact
and feasibility of each of these use cases to understand better blockchain’s
overall strategic value and how to capture it.
Our analysis suggests the following three
key insights on the strategic value of blockchain:
·
Blockchain does not have to be a
disintermediator to generate value, a fact that encourages permissioned
commercial applications.
·
Blockchain’s short-term value will be
predominantly in reducing cost before creating transformative business models.
·
Blockchain is still three to five years
away from feasibility at scale, primarily because of the difficulty of
resolving the “coopetition” paradox to establish common standards.
Companies should take the following
structured approach in their blockchain strategies:
1. Identify value by pragmatically and skeptically
assessing impact and feasibility at a granular level and focusing on addressing
true pain points with specific use cases within select industries.
2. Capture value by tailoring strategic approaches to
blockchain to their market position, with consideration of measures such as
ability to shape the ecosystem, establish standards, and address regulatory
barriers.
With the right strategic approach,
companies can start extracting value in the short term. Dominant players who
can establish their blockchains as the market solutions should make big bets
now.
The
nuts and bolts of blockchain
With all the hype around blockchain, it
can be hard to nail down the facts. Blockchain is a distributed ledger, or
database, shared across a public or private computing network. Each computer
node in the network holds a copy of the ledger, so there is no single point of
failure. Every piece of information is mathematically encrypted and added as a
new “block” to the chain of historical records. Various consensus protocols are
used to validate a new block with other participants before it can be added to
the chain. This prevents fraud or double spending without requiring a central
authority. The ledger can also be programmed with “smart contracts,” a set of
conditions recorded on the blockchain, so that transactions automatically
trigger when the conditions are met. For example, smart contracts could be used
to automate insurance-claim payouts.
Blockchain’s core advantages are
decentralization, cryptographic security, transparency, and immutability. It
allows information to be verified and value to be exchanged without having to
rely on a third-party authority. Rather than there being a singular form of
blockchain, the technology can be configured in multiple ways to meet the
objectives and commercial requirements of a particular use case.
To bring some clarity to the variety of
blockchain applications, we structured blockchain use cases into six categories
across its two fundamental functions—record keeping and transacting. Some
industries have applications across multiple categories, while others are
concentrated on only one or two. This framework, along with further industry
and use-case level analysis, led to our key insights on the nature and
accessibility of the strategic value of blockchain.
Three
core insights about the strategic value of blockchain
Our analysis revealed some key takeaways
about blockchain.
Blockchain does not need to be a disintermediator to generate
value
Benefits from reductions in transaction
complexity and cost, as well as improvements in transparency and fraud controls
can be captured by existing institutions and multiparty transactions using
appropriate blockchain architecture. The economic incentives to capture value
opportunities are driving incumbents to harness blockchain rather than be
overtaken by it. Therefore, the commercial model that is most likely to succeed
in the short term is permissioned rather than public blockchain. Public
blockchains, like Bitcoin, have no central authority and are regarded as
enablers of total disruptive disintermediation. Permissioned blockchains are
hosted on private computing networks, with controlled access and editing
rights.
Private, permissioned blockchain allows
businesses both large and small to start extracting commercial value from
blockchain implementations. Dominant players can maintain their positions as
central authorities or join forces with other industry players to capture and
share value. Participants can get the value of securely sharing data while
automating control of what is shared, with whom, and when.
For all companies, permissioned
blockchains enable distinctive value propositions to be developed in commercial
confidence, with small-scale experimentation before being scaled up. Current
use cases include the Australian Securities Exchange, for which a blockchain
system is being deployed for equities clearing to reduce back-office
reconciliation work for its member brokers.5IBM
and Maersk Line, the world’s largest shipping company, are establishing a joint
venture to bring to market a blockchain trade platform. The platform’s aim is
to provide the users and actors involved in global shipping transactions with a
secure, real-time exchange of supply-chain data and paperwork.
The potential for blockchain to become a
new open-standard protocol for trusted records, identity, and transactions
cannot be simply dismissed. Blockchain technology can solve the need for an
entity to be in charge of managing, storing, and funding a database. True
peer-to-peer models can become commercially viable due to blockchain’s ability
to compensate participants for their contributions with “tokens”
(application-specific cryptoassets) as well as give them a stake in any future
increases in the value. However, the mentality shift required and the
commercial disruption such a model would entail are immense.
If industry players have already adapted
their operating models to extract much of the value from blockchain and,
crucially, passed on these benefits to their consumers, then the aperture for
radical new entrants will be small. The degree to which incumbents adapt and
integrate blockchain technology will be the determining factor on the scale of
disintermediation in the long term.
In the short term, blockchain’s strategic value is mainly in
cost reduction
Blockchain might have the disruptive
potential to be the basis of new operating models, but its initial impact will
be to drive operational efficiencies. Cost can be taken out of existing
processes by removing intermediaries or the administrative effort of record
keeping and transaction reconciliation. This can shift the flow of value by
capturing lost revenues and creating new revenues for blockchain-service
providers. Based on our quantification of the monetary impact of the more than
90 use cases we analyzed, we estimate approximately 70 percent of the value at
stake in the short term is in cost reduction, followed by revenue generation
and capital relief .
Certain industries’ fundamental functions
are inherently more suited to blockchain solutions, with the following sectors
capturing the greatest value: financial services, government, and healthcare.
Financial services’ core functions of verifying
and transferring financial information and assets very closely align with blockchain’s core transformative
impact. Major current pain points, particularly in cross-border payments and
trade finance, can be solved by blockchain-based solutions, which reduce the
number of necessary intermediaries and are geographically agnostic. Further
savings can be realized in capital markets post-trade settlement and in
regulatory reporting. These value opportunities are reflected in the fact that
approximately 90 percent of major Australian, European, and North American
banks are already experimenting or investing in blockchain.
As with banks,
governments’ key record-keeping and verifying functions can be enabled by
blockchain infrastructure to achieve large administrative savings. Public data is often siloed
as well as opaque among government agencies and across businesses, citizens,
and watchdogs. In dealing with data from birth certificates to taxes,
blockchain-based records and smart contracts can simplify interactions with
citizens while increasing data security. Many public-sector applications, such
as blockchain-based identity records, would serve as key enabling solutions and
standards for the wider economy. More than 25 governments are actively running
blockchain pilots supported by start-ups.
Within healthcare, blockchain could be the
key to unlocking the value of data availability and exchange across providers,
patients, insurers, and researchers. Blockchain-based healthcare records can
not only facilitate increased administrative efficiency, but also give
researchers access to the historical, non–patient-identifiable data sets
crucial for advancements in medical research. Smart contracts could give
patients more control over their data and even the ability to commercialize
data access. For example, patients could charge pharmaceutical companies to
access or use their data in drug research. Blockchain is also being combined
with IoT sensors to ensure the integrity of the cold chain (logistics of
storage and distribution at low temperatures) for drugs, blood, and organs.
Over time, the value of blockchain will
shift from driving cost reduction to enabling entirely new business models and
revenue streams. One of the most promising and transformative use cases is the
creation of a distributed, secure digital identity—for both consumer identity
and the commercial know-your-customer process—and the services associated with
it. However, the new business models this would create are a longer-term
possibility due to current feasibility constraints.
CONTINUES IN PART II
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