This report was co-authored by independent blockchain consultant Tim Myers, and Belatrix Software
Blockchain, the general ledger system, is on the top of every tech analyst, investor, and executive’s thoughts for the future. And for good reason. It’s ability to enable a global, open, system of record for every transaction we make while providing us with unparalleled control, will fundamentally change our lives in the coming years.
In this report, rather than explaining what is blockchain technology, we will rather argue the need for executives to start thinking today about how their industry and business will change.
“Blockchain…is the biggest innovation in computer science — the idea of a distributed database where trust is established through mass collaboration and clever code rather than through a powerful institution that does the authentication and the settlement.”
Don Tapscott, Blockchain Revolution
The emergence of the iPhone in 2007 heralded in a decade of new mobile technologies, and the creation of an app ecosystem whose effects are still changing business today. However, blockchain will make this development pale in comparison, and it’s why many analysts consider it to be on a par with the development of the Internet. Another way of looking at it is from the financial analyst, Chris Skinner, who has pointed out, that blockchain is the “core technology” of what he calls the “Internet of Value” – the new forms of value being generated and traded by digital technologies.
However, it’s worth sticking with the iPhone analogy for a little longer- because it is mobile technology which will prove to be a fundamental part of the widespread implementation of blockchain – by providing the means (via biometrics, your location etc) of identifying people.
In a major research study on digital transformations, MITSloan recognized that successful transformations are really about strategy, rather than technology. The research found that mature digital businesses had focused on creating a digital strategy – involving new processes, talent, culture, and business models, as opposed to concentrating on the technology. Exactly the same philosophy applies to blockchain.
The introduction of blockchain into an organization results in fundamental business change. Indeed this business change is arguably greater than the technological challenge of implementing it.
The challenge is that the curve to business adoption is long. So far we’re seeing organizations invest and experiment in the technology, but unwilling as yet to undergo a discussion about re-conceptualizing their business based on blockchain – for many executives it is a leap too far.
An additional challenge is the unrelenting focus on the technology. In order to attract venture capital and media attention, start-ups tend to promote the fact that their product or service is based on blockchain technology. Meanwhile more established organizations also aim to highlight their latest POC based on blockchain technology. Thus both start-ups and enterprises are missing the fundamental conversation organizations need to have about what it means to re-conceptualize and re-architect their business for a world where blockchain dominates.
For example, in our experience we have seen organizations invest significantly in hiring individuals with blockchain or other cryptocurrency experiences, putting together dedicated teams to explore opportunities, and creating impressive proof of concepts. Indeed, investments and POCs were initially led by banks and fintech companies – almost every tier one financial institution, from Barclays, Santander, Deutsche Bank, ING and others, has been working with blockchain since at least 2015. However, so far, few of these POCs have made any significant change to banking operations. Organizations are struggling with the implementation, and the business change this results in.
Enterprises may well be those investing the most dollars in blockchain at the moment, but start-ups will be best positioned to take advantage of it going forward. This is because of the fundamental change that it will result in – we will witness a new wave of disruption, similar to the emergence of AirBnB, Uber, and TransferWise. But indeed, while we may think of organizations like AirBnB as transforming business as normal, the emergence of blockchain-based business will in-turn put these disrupters out of business. Why? Because companies such as AirBnB are still business based on centralized networks – or to put it another way, there is an exchange of data which occurs on a centralized server. The next generation of startups will be businesses based on peer-to-peer exchange based on a blockchain network. And as these startups will be built on blockchain, they won’t have to contend with the massive upheaval other organizations will need to implement in order to use the technology.
When blockchain first emerged, it was difficult for developers to build applications using the technology. It was even harder for executives to understand the implications. Individuals needed to have a lot of specialized knowledge. Typically the early adopters of blockchain were people interested in open source, with a solid understanding of different architectures, and interested in the potential of blockchain. Today however the situation is changing – although it remains highly complex. Open source blockchain platforms, such as Ethereum, make it easier for entrepreneurs to build blockchain businesses, and easier for executives to re-imagine existing business processes. As the technology matures (and it is doing so rapidly), so it becomes simpler for individuals to re-think business models and designs, and consider how to re-imagine their business on a blockchain platform.
The typical advice for executives who are starting to look at blockchain, is to start with one application. Indeed, this is exactly what this Harvard Business Review article argues organizations should do: “For most, the easiest place to start is single-use applications, which minimize risk because they aren’t new and involve little coordination with third parties. One strategy is to add bitcoin as a payment mechanism.”
However, we take a different perspective, in large part due to what results from the aforementioned approach. We believe the best approach is to focus on the foundational differences in business design between traditional and blockchain businesses. That is, understand the capabilities enabled by blockchain, design a business model that exploits those capabilities, and then build that new business model which wires itself into the market taking full advantage of what a blockchain business has to offer. Since blockchain enables a shift in paradigm from a model in which value doesn’t come from collecting data in a traditional value chain, but from the actual services being delivered in a peer-to-peer environment, you will be setup to complete in this new economy and not be hamstrung by legacy, centralized business design.
We believe that for organizations to understand what blockchain means for their industry and business, it is necessary to reexamine the fundamentals of their business and how a distributed ledger technology will change it. Don’t waste money by focusing on the technology and immediately building a POC, which will serve just as marketing material so that you can say you are working with blockchain, rather take a business led approach, and then based on this, look to experiment with the technology to operationalize your business.
Within this approach, you ensure that the business is driving the model formation, the profitability and the operating model. Also, to ensure success in these efforts, we recommend that a business executive leads the blockchain initiative, rather than your IT department.
So far we have argued that the key to understand blockchain is understanding the business change it will result in. It is important to consider that any industry or business that involves transferring data between entities, or there is a digital relationship, can and will be impacted by blockchain. To help provide inspiration, here we provide several examples of how blockchain is either already changing industries and businesses, or has the potential to do so in the future.
To emphasize our point about the business transformation blockchain will entail, we’ve seen companies experiment and run pilots in each of the industries highlighted here. For example, in insurance, the German company, Allianz, has used this technology for transacting a natural catastrophe swap (when a natural disaster strikes, typically it takes weeks or months for insurers to execute the bond transferring risk- with a smart contract, it automatically executes). While this is an interesting and valuable use case, what we’re arguing, is that blockchain will lead to the wholesale reimagination of the insurance marketplace, based on a peer-to-peer model.
Blockchain is clearly a new and emerging technology. For all the discussion in technology circles about the impact and importance of open source, there is no other open source project that has the potential or power of blockchain. However, starting a blockchain initiative means imagining what your business and your industry will look like in the future, and how this technology will enable you to change and provide better services to your customers.