Blockchain beyond the hype: What is the strategic business value? PART II
Feasibility at scale is likely to be three to five years away
The strategic value of blockchain will
only be realized if commercially viable solutions can be deployed at scale. Our
analysis evaluated each of the more than 90 potential use cases against the
four key factors that determine a use case’s feasibility in a given industry:
standards and regulations, technology, asset, and ecosystem. While many
companies are already experimenting, meaningful scale remains three to five
years away for several key reasons.
Common standards are essential
The lack of common standards and clear
regulations is a major limitation on blockchain applications’ ability to scale.
However, where there is strong demand and commitment, work is already under way
to resolve this issue. Standards can be established with relative ease if there
is a single dominant player or a government agency that can mandate the legal
standing. For example, governments could make blockchain land registries legal
records.
When cooperation between multiple players
is necessary, establishing such standards becomes more complex but also more
essential. Strong headway has already been made by industry consortiums, as
seen with the R3 consortium of more than 70 global banks that collaborated to
develop the financial-grade open-source Corda blockchain platform. Such
platforms could establish the common standards needed for blockchain systems.
Globally, regulators have taken varying
positions, but most are engaged rather than opposed. For example, the US
Securities and Exchange Commission’s recognition of ICOs as securities brought
ICOs under the agency’s regulation and into the mainstream.7In
2017, Standards Australia took a leadership position in developing a road map
of priorities on behalf on the International Organization for Standardization
and helping establish common terminology as a key first step. So far, many
governments are following a technologically neutral regulatory approach—not
promoting or banning specific technologies like blockchain.
Technology must advance
The relative immaturity of blockchain
technology is a limitation to its current viability. The misconception that
blockchain is not viable at scale due to its energy consumption and transaction
speed is a conflation of Bitcoin with blockchain. In reality, the technical
configurations are a series of design choices in which the levers on speed
(size of block), security (consensus protocol), and storage (number of
notaries) can be selected to make most use cases commercially viable. As an
example, health records in Estonia are still in databases “off chain” (meaning
not stored on blockchain), but blockchain is used to identify, connect, and
monitor these health records as well as who can access and alter them. These
trade-offs mean blockchain performance might be suboptimal to traditional
databases at this stage, but the constraints are diminishing as the technology
rapidly develops.
The immaturity of blockchain technology
also increases the switching costs, which are considerable given all the other
system components. Organizations need a trusted enterprise solution,
particularly because most cost benefits will not be realized until old systems
are decommissioned. Currently, few start-ups have sufficient credibility and
technology stability for government or industry deployment at scale. Major
technology players are strongly positioning themselves to address this gap with
their own blockchain as a service (BaaS) offerings in a model similar to
cloud-based storage.
Assets must be able to be digitized
Asset type determines the feasibility of
improving record keeping or transacting via blockchain and whether end-to-end
solutions require the integration of other technologies. The key factor here is
the digitization potential of the asset; assets like equities, which are
digitally recorded and transacted, can be simply managed end to end on a
blockchain system or integrated through application programming interfaces
(APIs) with existing systems.
However, connecting and securing physical
goods to a blockchain requires enabling technologies like IoT and biometrics.
This connection can be a vulnerability in the security of a blockchain ledger
because while the blockchain record might be immutable, the physical item or
IoT sensor can still be tampered with. For example, certifying the chain of
custody of commodities like grain or milk would require a tagging system like
radio-frequency identification that would increase the assurance being provided
but not deliver absolute provenance.
The coopetition paradox must be resolved
The nature of the ecosystem is the fourth
key factor because it defines the critical mass required for a use case to be
feasible. Blockchain’s major advantage is the network effect, but while the
potential benefits increase with the size of the network, so does the
coordination complexity. For example, a blockchain solution for digital media,
licenses, and royalty payments would require a massive amount of coordination
across the various producers and consumers of digital content.
Natural competitors need to cooperate, and
it is resolving this coopetition paradox that is proving the hardest element to
solve in the path to adoption at scale. The issue is not identifying the
network—or even getting initial buy-in—but agreeing on the governance decisions
around how the system, data, and investment will be led and managed. Overcoming
this issue often requires a sponsor, such as a regulator or industry body, to
take the lead. Furthermore, it is essential that the strategic incentives of
the players are aligned, a task that can be particularly difficult in highly
fragmented markets. Critical mass is much lower in some industries and
applications than in others, while in some cases, networks need to be
established across industries to achieve material benefits.
What
strategic approach should companies take?
Our research and emerging insights
suggests following a structured approach to answer the classic questions of
blockchain business strategy.
Where to compete: Focus on specific, promising use cases
There is a plethora of use cases for
blockchain; companies face a difficult task when deciding which opportunities
to pursue. However, they can narrow their options by taking a structured
approach through a lens of pragmatic skepticism. The first step involves
determining whether there is sufficient accessible value at stake for a given
use case. Companies can only avoid the trap of developing a solution without a
problem by rigorously investigating true pain points—the frictions for
customers that blockchain could eliminate.
Identification of specific pain points
enables granular analysis of the potential commercial value within the
constraints of the overall feasibility of the blockchain solution. Overall
industry characteristics as well as a company’s expertise and capabilities will
further influence this decision, as companies need to understand the nuances of
all these components to decide which use case will generate a solid return on
investment. If a use case does not meet a minimum level of feasibility and
potential return, then companies do not even have to consider the second step
of which blockchain strategy to adopt.
How to compete: Optimize blockchain strategy based on market
position
Once companies have identified promising
use cases, they must develop their strategies based on consideration of their
market positions relative to their target use cases. Many of the feasibility
factors already discussed are within a business’s sphere of influence; even
technology and asset constraints can be managed through trade-offs and a series
of design choices to shape a viable solution. Therefore, a company’s optimal
strategic approach to blockchain will fundamentally be defined by the following
two market factors, which are those they can least affect:
·
market dominance—the ability of a player
to influence the key parties of a use case
·
standardization and regulatory
barriers—the requirement for regulatory approvals or coordination on standards
These two factors are critical in
determining a company’s optimal strategic approach because they are integral to
achieving the coordination required .Blockchain’s value comes from its network
effects and interoperability, and all parties need to agree on a common
standard to realize this value—multiple siloed blockchains provide little
advantage over multiple siloed databases. As the technology develops, a market
standard will emerge, and investments into the nondominant standard will be
wasted.
This consideration of a company’s market
position will inform which of four distinct strategic approaches to blockchain
should be deployed and, in fact, further refine which type of use cases to
focus on first.
Leaders
Leaders should act now to maintain their
market positions and take advantage of the opportunity to set industry standards.
As dominant players pursuing use cases with fewer requirements for coordination
and regulatory approval, they can establish market solutions.
The greatest risk for these companies is
inaction, which would cause them to lose the opportunity to strengthen their
competitive advantages compared to competitors. An example of a leader
following this strategy is Change Healthcare, one of the largest independent
healthcare IT companies in the United States, when it launched an
enterprise-scale healthcare blockchain for claims processing and payment.
Conveners
Conveners need to be driving the
conversations and consortiums that are shaping the new standards that will
disrupt their current businesses. Despite being dominant players, they cannot
single handedly direct blockchain adoption as they face greater regulatory and
standardization barriers. Instead, they can position themselves to shape and
capture the value of new blockchain standards.
Convening tactics should be deployed for
high-value use cases—like trade finance—that cannot be realized without a
broadly shared set of standards. An example of a convener following this
strategy is Toyota, whose Research Institute set up the Blockchain Mobility
Consortium with four global partners to focus on blockchain solutions for
critical accelerators of autonomous vehicles: data sharing, peer-to-peer
transaction, and usage-based insurance.
Followers
Followers should also carefully consider
and implement an appropriate blockchain strategy. Most companies do not have
the capability to influence all necessary parties, especially when applications
of blockchain require high standardization or regulatory approval. Such
companies cannot be unaware of market innovations—they should keep a watching
brief on blockchain developments and be prepared to move fast to adopt emerging
standards. Just as businesses have developed risk and legal frameworks for
adopting cloud-based services, they should focus on developing a strategy for
how they will implement and deploy blockchain technology.
Followership is a particularly risky
strategy for blockchain, given the likelihood of select players in an industry
establishing private-permissioned networks, as in freight, for example. A
follower, no matter how fast, might already be locked out of the exclusive club
that established the initial proof of concept. Companies can mitigate this risk
by joining select existing and emerging consortia early, when the short-term
investment costs of membership are outweighed by the long-term costs of getting
left behind.
Attackers
Attackers are often new market entrants
without an existing market share to protect, so they need to seek disruptive or
transformative business models and blockchain solutions. Attacker approaches
are suited to use cases with the highest disruptive potential through offering
a service to the market that would disintermediate existing players. Most
peer-to-peer applications, from finance to insurance to property, fall into
this category. An example of an attacker following this strategy is Australian
start-up PowerLedger, a peer-to-peer marketplace for renewable energy that
raised 34 million Australian dollars through its ICO.
Incumbents should deploy an attacker
blockchain strategy in a separate noncore digital business. Blockchain as a
service (BaaS) providers often adopt an attack strategy because they are
selling the services into—and disrupting—industries in which they are not
currently participants. Companies pursuing an attacker strategy often seek
partnership with a dominant company in the market to leverage their leadership
influence.
The insights from our analysis suggest
that, beyond the hype, blockchain has strategic value for companies by enabling
both cost reduction without disintermediation as well as, in the longer term,
the creation of new business models. Existing digital infrastructure and the
growth of blockchain as a service (BaaS) offerings have lowered the costs of
experimentation, and many companies are testing the waters. However,
fundamental feasibility factors delimit what can be scaled and when as well as
the realistic time scales for return on investment on proof of concepts.
Assessing these factors with pragmatic
skepticism about the scale of impact and speed to market will reveal the
correct strategic approach on where and how to compete to enable companies to
start extracting value in the short term. Indeed, those dominant players who
can establish their blockchain as the market solution should be making the
moves—and making them now.
By Brant Carson, Giulio Romanelli, Patricia Walsh, and Askhat Zhumaev
https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/blockchain-beyond-the-hype-what-is-the-strategic-business-value?cid=other-eml-alt-mip-mck-oth-1806&hlkid=41226b87a0a142bda4d948118260f933&hctky=1627601&hdpid=6a0817ff-c71d-4a97-be68-b9b733f3d39f
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