Managers are increasingly interested in understanding how Blockchains can help their organizations, but the current body of knowledge doesn’t provide a structured approach to the problem, mostly offering high-level views on industry trends. That’s why, in this series of articles, I will try to create a usable framework to guide managers in identifying and capturing value opportunities using Blockchains.
Before assessing the potential applications of Blockchains from a business perspective we must first understand what we are working with: Blockchain is a technology that allows parties to conduct secure transactions without intermediaries by replacing trust in institutions with trust in technology. Some of the key features of a Blockchain are:
- Distributed computing: all the servers in the Blockchain maintain a full record of all the transactions that ever occurred in the network and can see all the transactions currently happening. Distributed computing ensures transparency, redundancy (the ability of the network to continue operating even if one of the servers goes offline) and gives all the servers on the network the ability to validate all transactions being processed, resulting in a consensus.
- Cryptographic security: each new transaction that occurs on the network is placed in a block, once a block is full the servers lock it with a digital key that forever links it to the previous block in the chain. All the computers in the network then update their copy of the full record with the new block, this ensures that once a transaction has been locked in a block it cannot be altered.
- Smart contracts: transactions on a Blockchain network can vary from simple transfers between two individuals to complex arrangements among multiple parties; smart contracts are agreements written in programming language that are automatically enforced by the network based on the programmed conditions. Once these contracts have been digitally signed by the parties involved and are submitted on the network they cannot be altered.
These features allow parties to securely conduct peer to peer transactions without needing to trust each other and without using intermediaries, earning Blockchain the nickname of trust protocol. Although Blockchains were first used to power cryptocurrency payments, their application to existing businesses settings can be far reaching; the financial service industry has been on the forefront of this technology (due to its value chain being highly intermediated) while other industries have just begun to realize strategic benefits:
- Maersk is set to reduce the costs related to processing shipping transactions by 20% through a Blockchain that allows all the parties involved in shipping and clearing the containers to share information on a single platform
- IBM Global Financing has freed up € 40mln in capital held up in disputes with its suppliers by implementing a Blockchain where payments are contingent to supplier information on manufacturing and shipping
- Walmart has successfully tested a Blockchain to trace the provenance of food along its supply chain with the objective of reducing potential contamination and wastage
- J.P. Morgan has reduced the time it takes to process international payment transactions from days to hours thanks to a Blockchain that allows participating institutions to securely share customer data
These examples show that significant operational benefits can be achieved across a multitude of industries and businesses by companies that are proactive in identifying areas of potential Blockchain implementation. The degree to which companies will integrate Blockchains in their operations will very but it can be summarized in the Four Stages of Blockchain adoption:
Stage 1 — Adaptation
To begin their journey, companies can task IT department with replacing existing tools based on old databases with Blockchain based solutions. This approach achieves two objectives; it helps IT departments become familiar with the peculiarities of Blockchain development while realizing quick wins and demonstrating the benefits of Blockchains to the whole company. To accelerate this initial stage, it is crucial to obtain a top-down mandate form management and the support of a technical partner familiar with Blockchain development.
Stage 2 — Optimization
The second stage of Blockchain adoption involves the optimization of existing value chains. In this stage companies need to map their processes and analyze their interactions with suppliers and customers to identify areas that could be improved with the introduction of Blockchains, for examples by eliminating intermediaries. In this stage companies can achieve substantial operational savings (usually in support functions like customer service, supply chain, procurement and finance), increase product margins and reduce lead-times.
Stage 3 — Renovation
While the second stage was focused on optimizing the company’s cost structure, the third stage is focused on creating new revenue sources and strengthening the company’s competitive positioning. In this context Blockchains become an enabler for the creation of innovative products and services that leverage the technology’s features to offer new value to customers. With the advent of potentially distributed services companies can also create value by taking on the role of “governance managers”, coordinating consumer consensus to establish and grow a product platform.
Stage 4 — Revolution
The fourth stage of adoption is characterized by a radical change in organizational structures. Companies in this stage will be able to create decentralized structures where the work to be produced will be prioritized via consensus, the workers producing it matched via digital reputation and rewarded with smart contracts. Some startups are already experimenting with this decentralized autonomous organization but the biggest benefits are to be found in larger organizations, since they have the most difficulty to adapt rapidly.
The Four Stages is a useful framework to assess the status of Blockchain adoption in a company while also providing a high-level map of areas where Blockchains can be implemented and the type of benefit they can provide.