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).
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