Cryptocurrencies like Bitcoin might be grabbing all the headlines, but the potential impact of blockchain in business means you have to dig further than you’ll find in simple discussions of tokens, coins, and ‘mining’. Blockchain technologies are already at work in a range of business settings, across diverse industry use cases, and they have the potential to disrupt business models far beyond their fintech origins.
Blockchain already means business
Blockchains already possess many characteristics that lend themselves well to a variety of business use cases beyond cryptocurrencies. They’re distributed and sustainable; they can reduce costs by removing the traditional role of intermediaries in a business network; they can be used to track assets across a supply chain, with the immutability of their records establishing unchallengeable provenance; and they can be used to automate business processes that span multiple organisational jurisdictions.
Smart contracts have the potential to take blockchain applications much further
The business logic that can now be encoded into nodes on a blockchain network can be used to execute workflow actions autonomously, taking input from data on and off the chain. This capability provides the means to extend business processes beyond traditional organisational boundaries, in interesting new ways.
It also hints at the development of new class of distributed ‘organisation’ that might exist purely within the code on a blockchain, designed to execute tasks and take decisions without human input. However without prudent measures in place to assure smart contract code quality, and provide safeguards against unintended action, it’s unlikely we’ll see any large-scale public implementations of these autonomous organisations in the short term.
Blockchain is evolving, and so are business models
Blockchain technology is already evolving more enterprise-friendly characteristics. Each move sees blockchains further dilute the original Bitcoin vision, but brings the technology far closer to traction in mainstream B2B scenarios beyond cryptocurrencies. At the same time, forward-thinking organisations are starting to evolve their own thinking too, collaborating on projects to test how blockchain might transform the way they do business.
There’s also a growing startup community focused on disrupting whole industries – from peer insurance, through community energy grids, to artist-led music publishing – but we’re still a way off seeing any significant impact from these initiatives.
The time to start exploring is now. You need to understand if and how a blockchain implementation might complement or extend your existing business model, and/or provide cost and efficiency savings. There are few enterprises that have created real industry-scale implementations so far: however, once implementations of ‘blockchain for business’ become more widespread and proven, we expect that new business models powering new market entrants, underpinned by enterprise-scale blockchain technology, will emerge rapidly.
What is blockchain for business?
The blockchain technologies that underpin cryptocurrencies like Bitcoin have the potential to transform the way many organisations work; especially where business processes, access, and control all extend beyond corporate boundaries. As a result, they also present opportunities to fundamentally change the way whole ‘systems’ of work operate, across a variety of industries.
In order to show how blockchain technologies might affect business systems, we first need to look at some of the challenges that organisations face when doing business with each other.
Challenges for traditional business networks
It’s useful to think of all the parties involved in a series of business transactions as being part of a business system; and that the component parts of a business systems communicate, and exchange assets and value with each another, as part of a business network.
In ‘pre-digital’ times, business systems were complicated, expensive and time-consuming to set up and (re)configure – so they tended to be relatively static. However the modern phenomenon of global mass interconnectivity has enabled more and more flexibility and scale – giving rise to more and more diverse and complex ecosystems:
- Business transactions may be co-ordinated across multiple parties, spread across different geographies and legal jurisdictions. Each participant will know some of these parties (and might trust some of them, to a certain extent); however in many cases there well be parties in a transaction that don’t know each other directly at all.
- Transactions may relate to tangible assets (such as land, cars, or food); intangible assets (such as intellectual property, patents, rights controlling access and use of data); or the exchange of data itself.
- Some parties in transactions will be organisations; some will be individuals; and some may be automated, network-connected devices and business infrastructure components.
The cost of oversight and orchestration
Collectively these parties represent customers, suppliers, partners, regulators, government institutions, etc. – each with a stake in the system or market they’re operating in – and in many cases one party in particular will act as an intermediary or ‘controlling central authority’ to ensure that everyone follows the rules. Many of these networks are operated by the dominant force in their own ecosystem – one example is the Universities and Colleges Admissions Service (UCAS), an independent charity that operates the application process for UK universities. However there are others that act as trusted intermediaries operating in a wider industry context – such as Covisint (recently acquired by OpenText), which provides an IoT and Identity platform focused on automotive and transportation supply chains.
Figure 1: A traditional business network
Source: MWD Advisors
However, as figure 1 illustrates, all this oversight and orchestration comes at a cost: in time, money, and the need to develop a trust relationship so everyone’s happy with the arrangement.
Traditionally, a technological solution to managing these market transactions and relationships involves a database ledger – one administered and controlled by arguably the most interested party in the system. These systems rarely operate in isolation, though, and where processes and transactions cross boundaries there’s inevitably friction – which causes headaches (and that costs time and money to fix).
Around 2008, a person (or persons) unknown going by the name “Satoshi Nakamoto” devised a decentralised digital currency called Bitcoin. Bitcoin works on a peer-to-peer basis, where transactions take place between networked users directly (without recourse to a central trusted intermediary). Instead transactions are verified by peer users and indelibly recorded in a shared public ledger that’s distributed around the user network.
Distributed ledgers: creating mutually-agreed ‘sources of truth’
Distributed ledgers, like the Bitcoin blockchain, are replicated, shared, and synchronised digital data stores that are spread across multiple locations (and potentially across multiple organisations, geographies). Unlike a traditional database, there is no centralised store, nor indeed a central administrator or authority overseeing such as store. A distributed ledger is designed to enable parties in a business network, who don’t necessarily fully trust each other, to form and maintain a consensus view about the state of the data stored on it. For this to work, the parties involved need to be connected on a peer-to-peer network; and they need to agree to abide by the decision algorithms deployed to ensure consensus. This way, the version of the ledger synchronised across the network is taken as being the mutually-agreed system of record (and the de facto source of ‘truth’, as far as network members are concerned).
It’s the potential of distributed ledgers (blockchains) to be employed as alternative systems-of-record in business networks (see figure 2) that makes them so interesting for us here.
Figure 2: A peer-to-peer business network
Source: MWD Advisors
Let’s look at some of the features of blockchains that help to make them valuable within today’s digital networks.
Blockchain ledgers are immutable
Just like a historical paper-based ledger, a blockchain ledger is an ‘append-only’ storage system – i.e. none of the network members can ‘undo’ a transaction. Instead a new transaction needs to be committed to the chain that effectively reverses the first. This gives the ledger its immutability, which is a key characteristic when you need an indelible record of transactions that can’t be tampered with. That’s not to say it’d be impossible to change an entry – but, because every copy of every entry that came after it would have to be changed too, it’s effectively highly improbable that any attempt to subvert the ledger would go undetected.
Blockchain ledgers rely on mutually-agreed consensus
Because in a blockchain network there’s no one central ‘single source of truth’ that everyone has to rely on, it’s imperative that the actors in a network have a commonly-agreed way to agree on the correctness (or otherwise) of a transaction – a consensus mechanism.
There are various mechanisms available that help a blockchain network arrive at a consensus as to whether candidate transactions are ‘fit to be committed’. Some mechanisms are optimal in an environment in which none of the parties have existing trust relationships, but these are expensive (in time and money) to operate. Other mechanisms incur far less cost, but rely on there being a certain amount of trust and identity assurance in the blockchain network relationship (based on existing real-world business relationships and contractual agreements).
The Bitcoin blockchain doesn’t make any assumptions about trust between parties. Its consensus mechanism is called proof-of-work, where nodes on the network compete to solve a cryptographic puzzle that is increasingly hard to do, but much easier to verify. Whoever gets the answer first is rewarded with bitcoins for their trouble (because the compute power required costs a lot in energy). The process is referred to as “mining” for bitcoins. Whilst it’s appropriate in the no-trust world of Bitcoin, this costly approach represents an unnecessary expense in a business network where parties are known to each other.
Blockchain technology is evolving, and its applicability is changing as a result
The birth of private blockchains
Blockchains like the bitcoin blockchain are ‘public’ – anyone can participate. In a public blockchain:
- Trust between parties is not assumed (or possible). A public blockchain is an open community, so anyone can join, but without further access and identity controls you can’t guarantee that any party is who they say they are in the real world (that counts for ‘things’ / devices as well as people).
- Consensus options are limited, and potentially expensive. However, if you’re truly operating in a no-trust environment, the ability to transact any business at all might well be worth the cost.
- Transaction speeds are also limited (because you can’t tune the network as you would if you were operating it as your own private network). Bitcoin’s blockchain, for instance, has a theoretical maximum throughput of only 7 transactions per second (tps); Ethereum boasts around 20 tps.
When you compare these throughput figures to the Visa network’s average throughput of around 2,000 tps (with a peak load much higher), it becomes clear why some use cases have demanded tweaks to the original idea of the public blockchain.
The result is what’s become known as ‘private’ blockchain networks. A private blockchain:
- Is hosted within a secured and permissioned network, so you can attest to the validity of users’ identities. Membership is defined within the context of, and can leverage the roles conveyed by, business relationships that exist outside of the blockchain in the ‘real world’.
- Doesn’t need to incentivise “miners” with cryptocurrency to operate its consensus mechanism because it can rely more on ‘real world’ relationships. That’s a very important distinction. If your B2B network is private, and you can fall back on other methods that leverage known identities and business relationships, then a proof-of work consensus mechanism represents an unnecessary cost.
- Gives transactions potentially enhanced privacy, because it can specify which parties have visibility of which activity and data. Not every party needs to necessarily see every transaction, or indeed be aware that it’s taken place.
A private blockchain can even grant enhanced permissions to system-wide auditors for more transparent and real-time inspection of compliance with regulations, rather than preparing retrospective reports. It’s also possible to specify which parties you trust to be involved in the execution consensus mechanisms, and so on.
Blockchains can do more than just store ‘digital fingerprints’
Most ‘first generation’ blockchains (i.e. mainly Bitcoin derivatives) don’t store ‘real’ (non-cryptocurrency) data in the blockchain itself. Instead they store ‘digital fingerprints’ (hash values) that link to digital assets which have to be held elsewhere. In these cases, the blockchain is used to track ownership of these assets, and act as an immutable log of activity.
This means that, although the first generation of blockchains can enable trivial tasks (like making cryptocurrency payments), they can’t be used to run any more complex processes; nor can they enforce any permissioned access to data stored elsewhere. Naturally, this limits their practical uses in business.
However, developments in blockchain technology (post Bitcoin) have enabled complex business logic to be encoded into blockchains, and this code can run against data held on-chain, or make references to data held elsewhere.
‘Smart contracts’ (sometimes called ‘chaincode’) can be used as part of a workflow, facilitating machine-to-machine, machine-to-person, and machine-to-business interactions. They can also be used to control access to data that’s held elsewhere (perhaps for privacy reasons, or perhaps because it’s too large and would clog up the chain if every node had to hold a copy).
It’s arguably this advance that’s paved the way for an explosion of non-cryptocurrency interest in blockchain technology, enabling people to effectively develop distributed applications that reside and run on a blockchain, triggered by external events and pulling in data from the Internet or IoT. Some proponents of blockchain technology even visualise whole ‘decentralised autonomous organisations’ that might operate independently of any human intervention once they’ve been initialised.
Where do blockchains fit today?
What’s blockchain good for?
Blockchain technology has the potential to help organisations most in situations where:
- B2B business processes extend beyond the oversight and management provided by any single organisation, and where there’s a desire to remove costly and complex intermediaries (or where there’s either no obvious or suitable candidate for the role).
- Multiple parties share control over data (i.e. don’t simply share access to the data itself, where permissions are controlled by a single entity – there are myriad cloud-based storage solutions targeting the latter).
- There’s a drive to make the process of compliance auditing more efficient (moving from retrospective periodic reporting, to the real-time inspection of a transparent ledger) – something that permissioned blockchains’ role-based access can provide.
- There’s a need to track assets across a multi-party end-to-end supply chain, and to be able to provide an authoritative source of provenance information.
However, as with anything that has the potential to impact organisations’ processes and behaviours, implementing a blockchain within a business network will involve significant effort and cost. What this means is that unless there’s a dominant partner in a consortium driving the change forwards (maybe a government department, the manufacturer at the head of a supply chain, or a platform provider with their own ecosystem), if you want to pursue blockchain technology you’ll need to not only create a shared business case for implementing the overall decentralised business model; each individual organisation taking part also needs to ensure its own interests are best served by the change, with its own internal business case.
A blockchain implementation has to make economic sense (not just demonstrate technological possibility). At the moment most cases are still only being made to prove concepts ‘in the wild’; though most participants are expecting the pay-back to truly come when a blockchain model is operational at scale.
What isn’t blockchain technology good for?
Athough a blockchain can serve as a database for recording transactions, it’s not a replacement for every type of database (and it’s not without its pain to set up and run). If a requirement is well enough addressed with a centralised traditional database, controlled by a single authority (in the traditional manner), or it can be addressed perfectly well using replication or multiple databases; or if all the business processing and data access control required to co-ordinate a business system is taking place under the authority of a single organisation with no concerns – then your business case for employing blockchain technology is going to be weak.
The five main types of blockchain application
At the time of writing this report large-scale deployments of blockchain technologies are very rare. However, we have come across many inspiring, innovative pilots and demonstrator projects running in a range of industries – some even mature enough already to have gone into limited production.
We see five different types of applications of ‘blockchain for business’:
- Global payments – eliminating intermediaries to simplify cross-border transactions, reducing costs.
- Digital identities and personalisation – where individuals (rather than any controlling intermediary) own and control their own unique digital identifiers, and can use them to obtain access to (or even personalise) digital products and services.
- Controlling access to data – where one party selectively grants permission for other parties in the network to access data (whether on-chain, or held elsewhere) and process it in workflows.
- Providing asset provenance – allowing multiple parties (across company, industry, and geographic boundaries) to exploit the transaction assurance inherent in blockchains to establish retrospective provenance of the assets tracked through supply chain waypoints; even (through the ingestion of IoT sensor data) logging how they’re being treated, when, and under whose responsibility.
- Smart contracts automation – using business rules stored in smart contracts, triggered by events and processed using both on-chain and off-chain data, to effectively act as ‘distributed applications’ that automatically execute workflow actions.
Figure 3 (below) shows the most common mappings of these project types onto industry-specific use cases. At the moment, financial services is the industry furthest ahead by in terms of blockchain maturity (and within that, blockchain-enabled payments represent the most common use case – i.e. the application closest to Bitcoin’s origins). However manufacturing (principally supply chain provenance), and government (identities, access to data) are maturing fast as organisations start to see benefit from ‘second generation blockchain’ proof-of-concept projects.
Figure 3: How blockchain project types map onto industry use cases
Source: MWD Advisors
Blockchain in action
In the sections below, we highlight examples of how blockchain technology is already being explored across different industries.
Financial services and insurance
Blockchains remove the need for a trusted counterparty as intermediary, eliminate the risk of a single point of failure, provide transparency, and facilitate automation. Examples include:
- Cross-border payments, trade finance, and securities – providing automated reconciliation of accounts, shortening of settlement periods to free up capital; they also provide greater visibility into the status of transactions, increasing trust, and potentially reducing the cost of regulatory reporting.
- Micropayments amongst highly distributed parties in the sharing economy. Although there are scalability issues here, a number of solutions are being presented (such as bundling micro-transactions into one on-chain transaction to prevent them swamping a network’s capacity).
- Insurance claim automation – such as triggering compensation automatically in response to an event.
- Insurance parties’ disintermediation – for example, relating to death registration for life insurance, or subrogation in vehicle insurance to recover claim amounts from at-fault drivers (both typically involving many parties).
- Health record information stored on a blockchain, with access shared amongst patients, hospitals, insurers, and more (but with the patient in control of third-party access permissions) has the potential to speed up health insurance claims.
Whole-life value chains in manufacturing are complex and stretch across design, sourcing, manufacture, distribution, and into after-sales and warranties. Examples include:
- Establishing an agile, fluid supply chain with smart contracts automatically negotiating and completing transactions by monitoring the status of key variables (like prices and delivery times).
- Reducing administrative overhead of Supply Chain Management. Blockchains can provide trust across the many business domains that goods may traverse. Additional autonomy may be provided by integrating with connected machines and infrastructure, so that embedded sensors automate the process still further and provide addition status information.
- Provenance information about every component part in a product may be provided by a blockchain’s immutable asset register. Its transparency means that this information can be made available to all parties involved; and the specific nature of the information means that targeted decisions can be made about recalls, etc.
Government use cases revolve mainly around identity, access to services, and access to public information. Examples include:
- Transferring and tracking ownership of assets (such as property) via a blockchain can drive more transparency if buyers and sellers are connected directly, and payments made without the need for an escrow account and intermediary to ensure smooth running of the process.
- Trusted identities for individuals remain a problem due to identity theft, the complexity of background checks, etc. There are many people who don’t actually possess sufficient documentation to prove their identities (or their entitlements to hold land). Unforgeable digitally-authenticated birth certificates may be issued on a blockchain, time-stamped, and made available worldwide.
- Voting process undertaken using blockchain identities may not only reduce verification costs, but also provide an immutable record that votes have been cast, and counted.
Transport and travel
Supply chain use cases apply just as well in the automotive industry as they do in any other, but in addition:
- Full lifecycle digital twins can be created for cars that enable a blockchain to maintain a digital maintenance book that tracks the provenance of component parts and fine-tunes predictive maintenance schedules. It can also help manage the vehicle as ownership passes through multiple parties (dealership, owner, leasing agent, etc.) right through to disposal.
- Personalisation options, enabled by blockchain identities, may be delivered to customers where manufacturers offer different versions of a car varying only by software (based on identical hardware); and these may be used to apply the same enhancements – whether an individual is driving their own car, or a rental version of the same model.
- Micropayment transactions via the blockchain may be used to pay for the recharging of an electric vehicle plugged into a third party’s supply, using data on the vehicle’s ownership profile to bill the entity ultimately responsible (saving the owner of an electric company car from having to claim back the cost of work-related travel).
- Ride-sharing may be disrupted by a platform that connects riders directly with drivers and manages payments through smart contracts; driver on-boarding could also be largely disintermediated by connecting drivers, insurers, government agencies responsible for driver and vehicle licensing, background checks, and so on.
Key considerations and issues
The experiences of early-to-market blockchain technology vendors and early technology adopters have already highlighted some common learning points, applicable right across different industry and use case types.
Below we split these into three groups: technology considerations, adoption considerations and governance and regulation considerations.
- Blockchain can provide a way to reduce the cost of establishing and maintaining trust in business transactions.
- Blockchain’s peer-to-peer nature provides a way of removing expensive (trust-maintaining) intermediaries, thereby reducing the cost and complexity of doing business.
- A blockchain network can be more sustainable than the alternative, because its continued existence doesn’t have to be dependent upon the continued existence a single ‘sponsoring’ or controlling authority).
- Smart contracts can be used to automate business processes autonomously across a distributed network.
- The immutability of blockchain records mean that they can be used to track assets across a supply chain and provide unchallengeable provenance.
- Blockchain technology is still immature. Industry standards are only just emerging and the vendor ecosystem is still forming. Your choice of supplier and underlying technology may well therefore be limited. There’s a skills shortage too.
- Blockchain technologies are grappling with scalability and privacy challenges as smart contracts take off and networks expand. When business logic is encoded into the chain you need more storage (because every node needs to hold the most recent state of the code being executed). There’s also a privacy issue around the visibility of that state data, but this can be mitigated if data isn’t shared ‘unnecessarily’ and instead is restricted to those with a stake in the transactions; or if it’s encrypted and steps taken so it can still be processed nonetheless. Each blockchain implementation has its own proposed solution – some involve splitting into sub-chains, breaking the notion of universal synchronisation for a while; some involve fancy mathematical procedures for acting on encrypted data, etc.
- Established blockchains are tackling the question of their throughput speeds. Many are doing this by reviewing their choice of consensus mechanism (which can also affect their operational cost too).
- A blockchain solution won’t exist in isolation – consider how to integrate it with legacy systems across the network.
- When using a public blockchain, be aware its immutability means that although the (encrypted) data will be around for the life of the ledger, the chosen encryption algorithms may not remain uncrackable 10 or 50 years in the future.
- Although some commercial blockchain technology products are now just starting to come to market, very few have yet been proven at scale in a commercial setting, and most blockchain activity is still confined to proofs-of-concepts. However, although blockchain may have its roots in digital currencies, the variety of projects underway already shows it has application far beyond the Financial Services sector.
- Although many adopters may start off by looking to blockchain to provide efficiency savings, the technology has the potential to disrupt and revolutionise business models and whole industries. In that sense it’s akin to the cloud computing market a few years ago. In its infancy, cloud computing was sold mainly as a means to cut storage and compute costs by scaling-out elastically in a highly cost-effective manner; what the move to cloud has brought some forward-thinking businesses, though, is the ability to transform their business and operating models. In a similar way to how ‘cloud economics’ are fuelling a raft of business innovations and disruptions, the same can become true for blockchain.
- When designing a blockchain-based system, work to understand which processes need to be shared across a business network, and which should be kept private to individual network members. The boundary between internal business process management and cross-boundary blockchain is a point of potential friction – with not only systems integration issues, but also questions about data governance and security, etc.
- When considering an implementation, don’t forget the cultural implications. Understand who the losers and winners will be. Intermediaries will need to cede control; some parties (amongst customers, partners, suppliers, etc.) may not believe they’re seeing the benefits. Parties will have to transfer their trust from where it was once placed (with individuals and organisations), to now being vested in algorithms and code – there will be barriers to overcome in some settings.
Governance and regulation
- There’s currently a lack of regulatory clarity on blockchain implementations – relating to questions around exactly what’s allowed to be stored on a distributed blockchain, and where; who should have access to it, and so on. The law is playing catch-up, and it’s doing it across all the legal jurisdictions the members of a distributed blockchain network may inhabit (so any legal position is going to be inconsistent). Inevitably there will be risk; make sure you and your stakeholders on the network are aware of them, and have the appetite for it.
- When implementing, think about who needs to change data, who needs to validate data, who even needs to know about the transaction and the parties involved. Answers to these questions will help you settle on a public or private permissioned blockchain network, and guide you as to whether you need mechanisms in place to provide additional privacy. The burden of regulatory inspection could even be eased by granting an auditor access to view the transactions across the whole network.
- Finally, consider the shared governance of (supposedly autonomous) smart contracts. What mechanisms are there to effect changes to the contracts should that become necessary (for example, because of subsequent legislation after the code has been implemented, or if the contracts are found to contain an error or vulnerability) – essentially, how can contracts be ‘patched’? What happens if something unexpected happens – are your organisation’s legal policies able to accommodate the operation of autonomous applications operating on its behalf?
What should you do next?
If your organisation is one of those investigating what blockchain might mean for its business (and its wider ecosystem), we advise you to consider the following steps:
- Understand your (and your partners’) business problem or opportunity.
- Clarify how well your organisation understands blockchain, and whether it has the capability to take a project forward; otherwise, find a partner that does.
- Make the case for a blockchain project by first assessing requirements for ‘blockchain affinity’. Look for opportunities relating to disintermediation, identity, automation, traceability, and so on.
- Establish cross-functional and cross-industry partnerships; and determine which vendors and technologies appear to be a good fit.
- Develop a proof-of-concept, but at the same time explore the implications of associated business models, adoption strategies (for all network partners), and metrics for assessing success. Where necessary, ensure you plan for how you’ll integrate with existing systems.
- Deploy, test, assess the impact, review, learn, and repeat.
These steps will get you off the ground, but in order to truly scale and ‘industrialise’ a blockchain implementation your organisation will need to embrace blockchain and its effects more widely across your enterprise, and more deeply across your business ecosystem.
This isn’t likely to be easy for any organisation to achieve by itself, but we expect leading software vendors to quickly take positions on how they can increase the ‘enterprise-friendliness’ of the technology in order to help bring blockchain to the masses. We expect vendors to focus on developing:
- Tools that enable repeatable, quality-assured development lifecycles for smart contracts.
- Open and interoperable platforms / frameworks for executing blockchains, offered as-a-Service to inject a measure of ‘cloud economics’ into the innovation cycle.
- Interoperability beyond blockchain technology – across the IoT, into back office business applications, and out into consumer-focused SaaS services.