Our current economic, legal and political systems’ records is quite like a rush-hour gridlock with an F1 car entrapped in between! And these records contain documents of paramount importance. These are critical tools which safeguard assets, set boundaries in organizations, establish and verify identities and chronicle events. Along with this they oversee interactions between countries, organizations, communities, and individuals. But the digital transformation which the economy has undergone is yet to touch these records. They still lie in their messy rush-hour gridlock! The administrative control needs proper regulation and maintenance and the digital world offers a solution.
The relatively new innovation, Blockchain Technology is the perfect solution to the current problem. Blockchain’s open, decentralized nature allows us to dream of a digitized future for contracts. Imagine a world where, contracts embedded in digital code are automatically executed. And moreover they are safe from alteration, tampering or deletion when stored in transparent, shared databases. Every single agreement, process, task, and payment would have an identifiable and verifiable digital record and signature.
With Blockchain taking over, all the middlemen will be eliminated. Transactions and interactions between individuals, organizations, machines, and algorithms will become easier and almost frictionless. Blockchain has immense potential and it’s a well-known fact that it will prove to be revolutionary in the business world.
But for Blockchain to live up to these expectations, we need to separate the hype from reality. We need to understand the effects before rushing reckless into Blockchain innovation. Right now there are several barriers in society, governments, organizations and technology which prevent Blockchain from realizing its full potential. For a full-fledged Blockchain revolution, these barriers need to come down. And this, in our opinion will take several years to achieve.
The main reason being Blockchain is a “foundational” technology rather than a “disruptive” one. Now this statement above might seem confusing when everyone around keeps talking about Blockchain’s disruptive power. It can reform our current economic and social systems by creating new foundations. But overtaking traditional business models or incumbent businesses is not something that it can do.
Though Blockchain will have an enormous impact, adopting and implementing it in our economic and social infrastructure will take decades. While it might seem unlikely from the amount of Blockchain projects flooding the market, it’s going to be a gradual and steady process. Let’s explore more on the topic and its strategic implications here.
Technology Adoption Patterns
Let’s have a look at other foundational technologies and their transformational process.
Technology adoption is not a new phenomenon. Every few years there’s a technological advancement which changes the way we do business or live our lives. The most relevant example in recent times is that of distributed computer networking technology. Adoption of TCP/IP (transmission control protocol/internet protocol) used this distributed computer networking technology. The internet was developed from the framework laid down by TCP/IP.
When it was first introduced in 1972, TCP/IP gained traction among the researchers on ARPAnet as the basis for e-mail. ARPAnet was used by the U.S. Department of Defense before commercial internet came to be used. The telecommunications architecture before the introduction of TCP/IP, was based on “circuit switching”. Here parties or machines had to connect through a pre-established connection which was sustained through an exchange. Telecom service providers and equipment manufacturers invested billions in building dedicated lines to ensure that any two nodes could communicate.
With the advent of TCP/IP, this model was turned upside-down. The introduction of TCP/IP brought about an open, shared public network. The network had no central authority or party which was responsible for maintenance and improvement. In TCP/IP, information was transmitted by the new protocol by digitizing and breaking it into very small packets. Each packet also included specific address information.
Initially, traditional telecommunications and computing sectors were unconvinced that TCP/IP could actually would make life easier. Most didn’t believed that robust data, messaging, voice, and video connections could be established on the new architecture. Neither did they imagine that the associated system could be secured and scaled.
But the late 1980s and 1990s saw several companies use TCP/IP partly to create localized private networks within their organizations. They did this by developing building blocks and tools which extended its use beyond e-mail. Thus slowly it supplanted the more-traditional local network technologies and standards. Organizations which adopted these building blocks and tools saw a great increase in productivity.
By the mid-90s, with the introduction of the World Wide Web, CP/IP gained more recognition and public usage. This network which was now public needed hardware, software, and services for people to connect to it and exchange information. Organizations like Netscape, Sun, Infoseek, Excite, AltaVista, Yahoo etc made use of this opportunity that the network provided.
From there on broad internet connectivity made way for the next wave of companies to create newer, more transformative applications. These brought about a fundamental change in the way value is created and captured by businesses. These companies built on a new peer-to-peer architecture, used coordination of distributed networks of users to generate value. Like how eBay used auctions on their site and changed the world of online retail.
TCP/IP moved through all the phases (single use, localized use, substitution, and transformation) in the last 30+ years. But it did manage to reshape the economy. Today most of the business world runs on internet-driven, platform-based business models. The internet has managed to bring about a radical change in the very foundations of our economy.
The New Architecture
As the internet transformed the business world a few years ago, Blockchain is also poised to do the same. But what exactly is it?
Blockchain came into the world as the underlying technology for Bitcoin. Basically, Blockchain is a continuously growing list of transactional records distributed across a peer-to-peer network. It is decentralized and managed by the peer-to-peer network itself. The information stored on the Blockchain is public and is constantly updated. While the data can be accessed by anyone, decentralization makes it almost impossible to alter corrupt the data. You can call Bitcoin the first application of blockchain technology.
If you look at it closely, blockchain and TCP/IP are quite similar.
- TCP/IP made way for bilateral messaging through e-mail while bilateral financial transactions are enabled by bitcoin.
- Just like TCP/IP, Blockchain’s development and maintenance is open, distributed, and shared. The core software is maintained by a team of volunteers around the world.
- And finally, when it was first introduced bitcoin was popular among an enthusiastic but relatively small community, quite like e-mail.
TCP/IP lowered the cost of connections, thus unlocking new economic value. Likewise, blockchain has the potential to decrease the cost of transactions greatly. If it is used as a system where all transactions are recorded, the economy will undergo a radical shift once again. This will make way for blockchain-based sources of influence and control.
Take for example, the current business process where the core function is to maintain records of transactions constantly. These records are private and distributed across internal units of the organization. Those records have information on past actions, performance, outside relationships of the organization and their internal working processes. These records will act as a guide for future planning. They provide a view not only of how the organization works internally but also of the organization’s outside relationships.
Mostly several organizations don’t have a master ledger with a record of all their activities. Instead they’ll be individual records scattered across internal units and functions. The problem occurs when verifying transactions across individual and private ledgers. This process is not only time-consuming but also prone to errors.
Let’s consider the example of a typical stock transaction. While the transaction is often completed in microseconds and without human intervention, the settlement, however it takes upto a week. Here, by settlement we mean ownership transfer of the stock.
This delay is due to the lack of access to each other’s’ ledgers. This means that it can’t be automatically verified that the assets are in fact owned by these parties and can be transferred. So the record of the transaction traverses through several organizations and the ledgers are updated individually. And while this happens a series of intermediaries act as guarantors to these assets before they are finally transferred.
As mentioned before the information stored on the Blockchain ledger is distributed across several identical databases. Each of these databases are hosted and maintained by a volunteer. Changes made in any one of the copies will be updated all the other copies simultaneously. All the ledgers will contain information of every single transaction (the records of the value and assets exchanged).
Transactions taking place on the Blockchain system are verified and settled securely instantly without the involvement of any third-party intermediaries. If you’re thinking of the infamous Bitcoin exchange hacks at the mention of security, let’s put your doubts to rest. These were the result of faults in separate systems connected to parties using the blockchain, not in the blockchain itself.
A Framework for adopting Blockchain
If you take the TCP/IP example, Bitcoin being Blockchain’s first application is like the early e-mail. TCP/IP took years to reach its current potential. Similarly, Blockchain will also take quite a while to reach its full transformative power. We can’t guess how long it will take. But we can take a wild guess at the kinds of applications which will first gain traction. This will tell us how eventually blockchain will be accepted broadly.
The evolution of foundational technologies and its business use cases is affected by two dimensions. It is historically proven that novelty and complexity affect how they evolve.
Novelty: This is the measure of how new this particular application is to the world. The more recent an application is, it will require more effort to get users to understand the problems it solves.
Complexity: This is the level of coordination involved in the ecosystem. So produce value from any technology, several different parties need to work together. The number and diversity of these different parties who will be co-ordinating is complexity.
Let’s consider the example of a social network. If the network has only one member, it is of little to no use. Whereas when many of your own connections have signed on to the network, it’ll be more worthwhile. In order to generate value for all the participants, it is necessary to get other users of the application on board. This rule applies to several blockchain applications as well. When these applications grow in scale and impact, it will need significant changes in the organization for their adoption.
Harvard Business Review has developed a framework mapping innovations against these contextual dimension. The dimensions are then further divided into quadrants – single use, localization, substitution and transformation.
The first quadrant, single use has applications whose novelty and complexity are both low. These applications create solutions which are better, highly-focussed and cost much lesser. Bitcoin, when it was initially introduced was used by people as an alternative method of payment. So it falls under this category.
Localization, the second quadrant has applications that have high novelty yet it can create value immediately with only a few users. This makes is easy to promote adoption of these applications. Based on single use applications, Blockchain innovations can create local private networks. These networks will have multiple organizations which are connected through a distributed ledger.
For the most part, the financial services sector especially small networks of firms are working on blockchain-based development currently. So the coordination required for this initial private Blockchain development is relatively lesser. Several well-known organizations in the financial sector are testing Blockchain Technology to implement in their processes. In the future, it’s possible that there will be a boom in private Blockchains serving particular purposes across several sectors.
Application in the third quadrant, Substitution are of lower novelty but with higher coordination requirements. These applications based on existing single-use and localized applications have broader and increasingly public uses, and aim to transform businesses. Issues arise when transforming or replacing current business processes because these processes are old and deeply entrenched in these business. With all this getting people to adopt these applications will be slow and difficult, so they’ll need higher coordination.
The best example of an application in this quadrant is cryptocurrency. While being a relatively new concept, they aim to transform the finance sector, but adoption at present is quite low. It will years of strenuous effort from all parties, from governments to institutions and the consumers to adopt it.
Transformation, the fourth quadrant has applications which are actually new-borns in the business world. These need a very high level of coordination from all the parties and also need to get institutional agreement on standards and processes. These applications if successful could totally transform the economic, social, and political systems. And getting people to adopt these will need major changes in social, legal, and political systems. HBR is of the opinion that “smart contracts” might possibly be the most transformative Blockchain application.
Each quadrant in this framework signifies the stage of development of technology. When you classify one a blockchain innovations based on these quadrants, it will help executives understand it better. Especially the challenges involved, collaboration and consensus requirements, and legislative and regulatory requirements. It will also serve as a guide to understand the kind of processes and infrastructure required to facilitate adoption. It can be used to assess the state of blockchain development in any industry. Additionally, it also helps you evaluate strategic investments in your own blockchain capabilities.
A guide for Blockchain Investment
Blockchain being a relatively new concept can seem confusing when you’re looking to adopt it in your organization. While the HBR framework will come in handy can help companies identify the right opportunities.
Single-use applications are by far the easiest ones to start and has minimal risks associated with also. And adoption also can be promoted with a little coordination with third parties. Adding bitcoin as a payment mechanism is a great strategy which will force various sectors to build Blockchain capabilities.
Blockchain can also be used internally as a database for applications. Like to physical and digital assets management, internal transactions record, and identity verification. This low-risk strategy offers another way for Blockchain adoption. Companies with multiple internal databases and struggling to merge will find this strategy quite useful. Organizations can pick up skills necessary for developing for more-advanced applications by testing out single-use applications initially. Experimenting is easier now because of the cloud-based blockchain services from both start-ups and large platforms like Amazon and Microsoft.
Companies are looking at localized applications as a natural next step in Blockchain development. If you look at it, several companies are currently investing in private blockchain networks. It appears that some of these Blockchain projects will make some real short-term impact. Several financial services companies have set up private blockchain networks in collaboration with a limited number of trusted counterparties. These private Blockchain networks can decrease transaction costs dramatically.
Localized applications can also help these organizations in tackling specific problems in transactions across boundaries. And the shipping industry has also adopted Blockchain in supply chain for tracking items.
Substitute application on the other hand will need careful planning, since it might be difficult to dislodge existing solutions. Applications which present alternatives to expensive or unattractive solutions and don’t need end users to alter their behaviour offer a good solution.
A substitute application with functionality that is as good as a traditional solution’s will gain better traction. Additionally, it must be easy for the ecosystem to absorb and adopt. An example for a substitute that involved meticulous planning and consideration is blockchain-based gift cards by First Data. Retailers offering them to consumers can dramatically lower transaction costs and improve security. This is achieved by using blockchain to track the flows of currency within accounts, thus eliminating external payment processors.
Lower cost of transactions and reshaping the economy using Blockchain
While work on applications in the first three quadrants are underway with several successful projects, transformative applications aren’t here yet. But it’s necessary to evaluate their possibilities now and invest in developing technology which will enable them.
These transformative powers will realize their full potential when tied to a new business model. This business model should have better logic of value creation and capture when compared to existing approaches. While adoption of such business models will need more coordination effort, it will ensure future growth for companies.
Take for example law firms. To make smart contracts worthwhile, law firms will have to make some considerable changes internally. Including gaining more expertise in software programming and developing skills in blockchain programming. Payment models should be reconsidered, the hourly payment model should be scrapped for transaction or hosting fees for contracts. These are just two possible approaches that they can take to gain traction. But irrespective of the approach, the business model implications should be understood and tested before making any switch.
Even though transformative applications might take off last, they are sure to deliver enormous value. Large-scale public identity systems and algorithm-driven decision making are two areas where these applications could have a profound impact. The public identity systems can come in handy for functions like passport control. And preventing money laundering and complex financial transactions involving many parties can benefit from algorithm-driven decision making. But for these applications to get adopted by the masses it’ll take at least a decade or more.
But later or not, these applications will make way for the rise new platform-level players. The new ecosystems will be coordinated and governed by these players, they’ll be like next generation’s Google and Facebook. The only thing required here is patience and understanding to realize such opportunities.
TCP/IP has more or less smoothed the way for Blockchain and also provides a good template for blockchain’s adoption. Currently, TCP/IP is omnipresent. Blockchain applications are being built on top of the digital data, communication, and computation infrastructure thus reducing the cost of experimentation. This will make way for new use cases to emerge rapidly.
The HBR framework is a godsend for executives to understand where to start building their organizational capabilities for blockchain. But organizations have to ensure that they have competent and knowledgeable staff. This blockchain team can develop company-specific applications across the quadrants, and to invest in blockchain infrastructure.
But to get accepted worldwide on the scale of TCP/IP, executives need to understand the risks involved in Blockchain experiments. Then there’s also the time horizons, barriers to adoption, and sheer complexity involved in getting the same kind of acceptance as TCP/IP.
A lot of industry sectors are turning towards Blockchain application development like financial services companies, but manufacturing is not. It can be said for sure that Blockchain will affect the way you do business. But when we cannot really say!