Upfront investment without a clear ROI, collaborating with your competitors, wider scope of use cases, complicated features and the network mindset – Building a strategy around Blockchain requires reinventing the business. Waiting is never an option. Consortium model (like trade agreements between countries) seems to be the aptest model where enterprises can apply blockchain technology.
Blockchain for Everything!
It seems to me that tech community is out of blockchain honeymoon phase. The corporate reports that come out these days have stopped praising blockchain as the savior of all businesses. It comes with the realization that the blockchain technology is not the panacea to all their problems, nor is it a replacement for an existing system. We see the believers waning away and doubters on the rise. Almost every week, we see some flash news on corporates investing in the blockchain.
“Blessed are those who have not seen and yet have believed.” — John 20:24-29
The main reason seems to be the “Fear of missing out.” However, in the age where organizations grow exponentially, waiting for clarity is never an option. The risk of doing nothing is greater than the risk of doing the wrong thing. As usual, there are a lot of players out there who are looking to take advantage of this situation. Business usually realizes the complexities and problems with the adoption. The barriers are technical as well as human. This article intends to educate you on the considerations before onboarding with a blockchain strategy. I apologize for being a bit technical here and there. However, there is no completely non-technical way to explain the concept.
Making a Valid Business Case for Blockchain
Why do we need to decentralization?
The fundamental question to be answered during the inception of the business case is why are we fighting centralization? From my previous blog post, blockchain is useful in the following scenarios.
- When we have multiple stakeholders who all need to access the same set of transactions and make value exchanges.
- When a consensus is required amongst the members whenever was a new transaction is added to the database.
- When the stakeholders inherently don’t trust each other, but still must do business with each other.
- Where data needs to be organized into lists and requires reporting.
In addition, I found few more after writing the last post.
- Where dispute resolution is a common occurrence, and the cost of dispute resolution is high and requires a large amount of time and resources.
- Where the transaction order and consensus are of prime importance. Imagine the havoc it would create if account debit and credits come in reverse order. Delivery versus Payment is a very important use case for the banks.
- Where disintermediation could facilitate lower costs, faster transactions, automatic reconciliation(Avoiding the pointless blockchain project, n.d.).
The point 7 is a bit shaky. One common argument is that blockchain would remove intermediaries and reduce the exploitation by an intermediary. On the other hand, in real life scenario, the middlemen are long known and trusted in the market. They do more than just merely pass the data (Building The Internet Of Trust: Selecting The Right Blockchain For Your Organization, 2016). So, replacing them may not always be reasonable. However, blockchain is more relevant in scenarios where a completely new market (e.g., a peer to peer lending or trading market) where the members don’t trust each other. In such a scenario, setting up a blockchain is faster and cheaper compared to setting up a new intermediary. Hence the key is not to think about what intermediaries to replace, but how to build a new trust less market – which is point 8.
- When setting up and trusting a new intermediary is risky although there is demand for making business transactions.
- When transaction audit (each transaction is related or created from a previous transaction) is important(Avoiding the pointless blockchain project, n.d.).
- When contribution from various members who contribute to a common cause should be incentivized based on how much they contributed. g., solar panels that pay for its maintenance as it gets paid by the grid based on its contribution.
The pioneers of blockchain adoption were from financial services for obvious reasons. They might have been responding to the threat of cryptocurrencies, and also their asset ledger system is fairly similar to blockchain’s shared ledger concept (Avoiding the pointless blockchain project, n.d.). Probably because Bitcoin, the first public blockchain, was designed as a value transfer system. For other industries, the usability may not be that obvious.
Inability to Quantify Cost and Long-Term Benefits
It is no fun to stand before the executive board and present your business case without being able to quantify cost and benefits. However, in the case of the blockchain, it is very difficult to put a number on the cost of development at this stage, as the technology is still growing. This means that the estimates must change periodically to adapt to the changes. So how can we substantiate the upfront investment without a clear ROI? For that, the business case must align with the strategic objective of the firm.
In near term, the aim could be to modify existing systems to support blockchain. However, it may not give you the expected result, as the existing inefficiencies might get carried on to the modified system. Instead, the aim should be to redesign business processes to take the best advantage of blockchain capabilities.
In long-term, blockchain could unlock new markets that were inaccessible before due to difficulty in obtaining information (such as a lending operation in emerging markets where people are not used to the western style of banking). It could improve customer satisfaction (for example decreasing customer onboarding time by improving KYC process on blockchain) and create new business models (Varghese & McCraw, 2017).
Cost savings could arise from the fact that blockchain is more self-sustainable compared to a database which requires constant monitoring of administrators (Blockchain or relational database? How to choose the right technology for your application, 2018). Also, blockchain is a technology of collaboration. The benefits could be gained by the network, only if there is considerable participation from the network. Hence the case should be written at an ecosystem level, and ROI should be calculated at a macro level considering economies of scale (Guidelines for blockchain adoption in the enterprise: How to compare frameworks, 2017). It is difficult to calculate a fair estimate on the ROI unless one has a crystal ball.
Being collaborative, the business case for blockchain should be written at an ecosystem level rather than an individual level. It requires reinventing the business model as a whole. Blockchain system design should embody this concept to be adapted and preserved into a permission network while centralizing some aspect of regulatory compliance and maintenance activity and while preserving the decentralized digital transaction processing (Guidelines for blockchain adoption in the enterprise: How to compare frameworks, 2017).
Choosing the right technology is challenging as we need to consider long-term and short-term costs, performance, features, and business risk.
Confusingly Large number of Vendors
As usual, the vendor selection can be complicated. The inherent complexity of blockchain technology only makes it worse by adding some additional barriers.
- Features: Does the platform provide advanced functionalities such as Smart Contracts as required by the business use case? Is the platform fully available in production or just in theory? Can it talk to other platforms, hardware?
- Type of Network: The currently most popular blockchain platforms, Bitcoin and Ethereum, were designed as public networks. Transparency may not be the top priority for businesses, especially if your competitor also has access to the network. The blockchain, in general, can be
- Open or Public network where the access permitted to everyone,
- Consortium networks where the access permitted only to a set of members,
- A permissioned network where member privileges differ based on consensus or centralized entity.
- Privacy: Traditionally, in open or public network, all nodes can act as validators, if they have the technical capability to do so. In a permissioned network, only certain nodes can validate a transaction. Some platforms such as Hyperledger Fabric has the concept of Channels, where only the subscribed members have access to the transactions in that channel. The public network that supports Smart contracts comes with the risk of members running malicious or poorly programmed smart contract in the network that is a risk to every member of the network. This is in a way no different from viruses and worms on the internet. Mathematically verified smart contracts and independent auditing agents can audit and approve the implementation of a smart contract before it is published on a public network. However, the choice of public or private depends on the business case, like how companies have VPNs and intranet vs. a website presence on the internet.
- Security: Consensus mechanism used in the chain plays an important role in the security as it upholds the “trustless” ness factor of the network. Existing consensus mechanisms such as Proof-of-Work is a serious barrier to scalability (discussed later in the article). Now a basket of different consensus mechanisms is available to choose. The consensus is more consequential to a public network where the members are completely unknown rather than closed or private networks. Private networks are seen to relax and use optional consensus mechanisms as the member are known to work together even before they joined the network.
- Identity: Another consideration to make is the identity of the user. In public chains, the anonymity of the user is given prime importance in various ways – through encrypted addresses, through mixers that combine multiple transactions into one pool that makes it difficult to trace the origin or through complex algorithms like zkSNARKS(Kasireddy, 2017). On the other hand, private or permissioned chains might require identity to be known to every other member of the group. This might be required by regulations and processes depending on the industry.
- Scalability / Latency / Transactions Per Second: Scalability of a public blockchain is highly dependent on the member node’s ability to scale up storage, bandwidth and computational power (Blockchains don’t scale. Not today, at least. But there’s hope., 2017). This limitation will force the public blockchain protocols to be limit the number of participating nodes that need to validate each transaction, resulting in some level of centralization or distributed system. Some blockchain platforms support off-chain channels to improve throughput. Others suggest sharding by dividing the overall state into smaller parts or diving the whole load into smaller loads. Some others propose performing the computations alone off the chain(Kasireddy, 2017).
- Cost of making a transaction: Factors such as the consensus mechanisms used, the presence of centralized validators, as well as the presence of a tradable cryptocurrency, could result in raising the cost of making a transaction (Read bootstrapping in my previous blog post for more details). Thus, the choice of the consensus mechanism, the choice on level of openness of the network and choice of tokenization would determine the cost of making a transaction.
- Choice of Consensus: Along with the factors that were described above, choice of consensus will determine the type of validators in the networks. Validators have the power to commit the transactions. Understanding who are the validators are also important – will they be biased in choosing transactions, will they be biased when it comes to resolving a conflict, will they censor your transactions and most importantly, what are their incentives to perform their duty.
- Industry-specific solutions vs. Generic solutions: Generic platforms are flexible. Flexibility usually comes at the cost of vulnerability. Depending on the business case, determine whether a smart contract is required or a faster value transfer, whether the case involves connecting the network to other devices, networks, external storage, and platforms. Industry-specific ones are usually efficient. Also, having industry experts on the vendor side would make it far easier to convey the pain points and implement the solution properly(Building The Internet Of Trust: Selecting The Right Blockchain For Your Organization, 2016).
- Open source vs. Proprietary: Open source software often has a huge community backing and hence ensure that the software is constantly evolving and up-to-date. It ensures that your software will have support even if one of the vendors in the community fall out. On the other hand, the vendor liability is less for an Open source. Proprietary software helps you design custom software specific to your hardware and business needs, making it more efficient. It could also act as your main competitive advantage.
- Ability to switch networks/ Interoperability: If sharing the data between different chains became easy, then the market would support more platforms. This reduces the risk of selecting the wrong platform. In addition, it gives you the flexibility to talk to customers/partners on other blockchains.
- Enterprise Integration: Almost all the business logic now doesn’t run on the blockchain. Hence the blockchain platform should have the ability to integrate with the current information systems easily. The adjacent system integration has a significant cost impact on blockchain projects, and if not focused on early in the planning stages, it can impede enterprise adoption(Guidelines for blockchain adoption in the enterprise: How to compare frameworks, 2017).
- Reliable Vendors: For long-term support from the platform, the vendor should have a sustainable business. The founder members, the political and regulatory environment of their operating location, their leadership and vision, their implementation timeline, availability of funds and ability to execute the promises are important factors in determining the vendor’s ability to run a sustainable business. Most of the projects are still concepts. Hence to have absolute confidence in the vendor’s products, much patience is required.
- Type of governance also plays a role in sustainability. If the governance is controlled on the chain and with uniform voting rights among the members, the chances that the public funds are misused or wasted can be reduced (under the assumption that members vote only with the best common interest). Some chains even set aside a percentage of the transaction fees for future development in the hope of becoming completely self-sustained at some point.
- Availability of Developer Talent and Development Tool Support
- IP conflicts
- Regulatory Risk and Global footprint: Keep in mind that technology as controversial as blockchain could be legal in one country and illegal in another. As the business tend to run global, the platform support should also be global.
- Standardised Technology: For multiple systems to work together, standardization is essential (Guidelines for blockchain adoption in the enterprise: How to compare frameworks, 2017). Such standardization takes time and matures with the platform and technology.
- Quantum Resistance: It is said that with the advent of quantum computers, the underlying cryptography that protects the information in 1st generation blockchains could be compromised. Hence platforms which are resistant to the quantum computer would be a better choice. However, the same encryption technology is being reliably used by financial institutions across the world. Availability of quantum computing for public use means an end to all that as well. Hence I feel that this is a strategy that all the encrypted digital systems will take have to take up at some point.
- Long-term hidden cost – warranty, support, upgrades, infrastructure.
In any case, a trade-off is the risk of centralization, security, scalability, throughput, volume, and complexity in governance needs to be made. The business case should define the priorities and hence influence the selection of the platform and vendor.
Cost of Verification
Another major consideration is the interaction between Digital and Physical worlds(Casey, Gopinath, Catalini, & Khan, 2018). The blockchain can only ensure credibility and authenticity of data that is stored in its network – in the digital realm. However, it is important to ensure that the data that enter the blockchain is valid as well. g., for a blockchain that trades gold, the identification of a gold bar added to the chain is protected and tamper proof. However, the physical gold bar could be fake. This is one of the fundamental drawbacks with this technology (discussed in a previous blog post).
Therefore, if your business case requires interaction with physical attributes, (sensors, measurements, IoT), then you need to take extra measure to ensure that the attributes recorded to blockchain from the sensors are true, valid and non-censored. This cost along with the cost incurred in blockchain to ensure trustable data is called cost of verification. Ideally, the aim should be to minimize cost and to ensure the quality of the recorded attributes. This cost should be accounted for the cost vs. benefit analysis while preparing the business case.
Cost of Networking
Bootstrapping is an important step in deploying any digital platform, especially blockchain. To be fully fault-tolerant, the network size should be big enough so that the probability of a single entity gaining control over the entire network is low. Hence decentralizing the bootstrapping process and protecting the network until it is secure enough is important(Casey, Gopinath, Catalini, & Khan, 2018). The complexities of the process raise the cost of networking even more.
An Effective Technology Strategy
Blochian tech is still in the growth phase. Different vendors are competing to win the iron throne of market share. One strategy to minimize the business risk is to diversify the vendor choice – choose different vendors for different use cases, based on their capabilities. As time passes, the technology matures, and only the vendors who can add value would remain. There may not be a single blockchain to rule them all, but rather multiple instances of private and public blockchains, working together based off of their specializations. An important aspect to choosing the right vendor is their ability to build in an ever-changing environment that encompasses the technology available today while having the flexibility to build on future implementations of blockchain protocols (Building The Internet Of Trust: Selecting The Right Blockchain For Your Organization, 2016).
Changes can be very stressful. Blockchain operates at an industry level. We have historically taken longer to adapt to such industry-wide changes. Technology could do its bit on being reliable and transparent. Human interactions are much more complicated than that. Our business run more on certain unsaid “human contracts” than written on a piece of paper or computer code. Hence the human element should be an important consideration in technology transformation programs. Remember that culture eats strategy for breakfast. Here are some distinctive hurdles at the human level that blockchain would bring about.
The culture of collaboration
The idea of collaborative growth and shared value may not be acceptable traditionally to many industries. Blockchain reaps benefits best when it runs at an industry level, integrating the whole of the value chain (a.k.a network effect). A new type of “Network first” attitude – understanding the importance of growing together rather than on one’s own(Varghese & McCraw, 2017). This requires collaboration between parties right from the proof of concept phase. The idea goes completely against individualism and more towards groups – The need of the many outweigh the need of the few. Herding cats would be an easier task.
Change in governance model
Building a network of members with contradicting interests itself is a great challenge. With blockchain, in addition to the conflict of interests, we have the issue of shared ownership of data, shared the cost of engaging, shared technology, shared business logic, shared security and shared benefits. New questions arise on the regulatory implications of a shared ecosystem – who will be liable and who will share the penalty. Also, there is a concern about who would control the addition or removal of members, who will allow parties to develop value-added services on the top and how to perform dispute resolution.
Fear of unemployment
Fear of automation and being flagged as “redundant” are some major concerns in the industry (remember the movie “Office Space”). Entire sections of departments (g., regulatory reporting division of a bank) could disappear with the advent of the blockchain. Such fears not only affect the employee’s morale but also makes them less collaborative when it comes to implementing new tech that could potentially replace them. One of the ways to handle this issue is by creating new positions that require man-machine collaboration (discussed in detail in my previous article). We cannot prevent the second machine age from coming. We can welcome it and make the best out of it.
Designing a Strategy
Now that you can see all the considerations that need to be made in deciding whether blockchain is good for your organization let us think about to create a workable strategy around it (A Strategist’s Guide to Blockchain, 2016).
- Network Mindset
- Develop a cross-functional team with a business sponsor to drive the strategy.
- Assess the long-term goals that we want to achieve with the blockchain technology – increased revenue, better compliance, cost reductions, quality improvements.
- As the blockchain is a technology that requires collaboration and networks, start Collaboration with Other Players in the Industry from the beginning itself.
- Be Prepared for Ambiguity as cost and benefits are not immediately clear. Focus on the strategic benefits in the long term rather than the cost benefits in the short term.
- Accommodate Iterative Learning as the technology is still in its growth phase and evolving. It is going to be a Startup life! Keep testing and refining the prototypes.
- Right place to start
- Prepare to Design New Business Processes, Instead of Replacing an existing process that would smartly accomplish the same result.
- Target your firm’s most distinctive capabilities that differentiate your products and services for your blockchain efforts (A Strategist’s Guide to Blockchain, 2016). Targeting your competitor’s differentiation factors is also an option.
- Target middle and back office processes first before going for direct customer impact (A Strategist’s Guide to Blockchain, 2016).
- Define the Priorities and consider the Trade-offs between vendor/platform selection, the risk of centralization, security, scalability, throughput, volume, complexity, and change in governance models, legislative and regulatory impacts, human elements and lag in adoption both inside the firm and in the industry.
- Use the insights from the first two sections to Create Valid Hypothesises around what impact you would expect to see once blockchain is implemented in these processes or capabilities. Collaboration with other functional teams and with Industrial players will help frame stronger and realistic hypothesizes.
- Diversify the investments in different platforms depending on the use case to minimize the risk.
- Create a roadmap and answer the following questions – is the solution scalable, achievable, acceptable to industry and customers, strategically aligned?
Compromising the true values of blockchain
If you look at all the platforms that have come after Bitcoin (the first public blockchain), they all tried to fix one or more limitations from their predecessor. Some of the platforms had to compromise the true value of blockchain to make it work for them. If we are compromising on the true values that attracted us to the technology in the first place, then why bother even adopting it?
Let’s be honest here, the current technologies available are tried and tested, stable and powerful, evolved considering all sorts of problems over last 30 years. Then why bother to invest time and money in a complex solution that is still in the proof of concept stage. Tech giants like Google and Amazon have long solved the problem of data synchronization and distributed storage. Their cloud services maintain the data integrity at many complex levels, while also maintaining throughput and cost. Incredible right? Doubtful?
The performance of blockchain should not be compared to a relational database, at least at this stage (Blockchain or relational database? How to choose the right technology for your application, 2018). There’s no clear advantage for either blockchains or relational databases when it comes to providing data integrity. Blockchains are fault tolerant and hence better to store data while relational databases are faster. Most of the blockchain vendors are targeting throughput comparable to Visa network, which is an excellent benchmark. Distributed ledgers, in general, follow a “confirm as you go” model rather than the traditional “confirm after the fact” model that databases support (Avoiding blockchain for blockchain’s sake: Three real use case criteria, 2018). Switching the order on how data is written makes a huge difference to operational risk.
Maybe at some point in the future, some vendor will have developed capabilities that would retain the true values of blockchain and showcase performance in production, at par with a relational database. Even for a use case that requires decentralization, other forms of technology are also coming up, such as DAGs and Hash Graph that, in theory, offers better performance. Perhaps now is the time that the blockchain technology is undergoing the test of time. Perhaps, maybe, to evolve and come back even stronger, with use cases and business models that no one ever imagined, like when Bitcoin came to our world. Perhaps.
“ Blessed are those who have not seen and yet have believed.” — John 20:24-29
Bitcoin was born in a chaotic time, with the hope and belief that it could transform the society. Like any other mass movement or idea, it was born as a response to corruption and greed. However, like any other mass movement or idea, the blockchain and cryptocurrency started breeding greed, polarization, and inequality as time passed. The greedy and the charlatans will consume the very foundation of the belief and burn the temple of trust down to the ground. All the doubtful will run for their life. From the ashes of the past, the belief will be reborn, and this time only the true believers would remain. Like how only a few internet companies with true value propositions survived the Dot Com bust. Bitcoin and blockchain get people religious (Orcutt, 2018). Indeed.
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