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Blockchain: Prep starts now; adoption comes later
While cryptocurrencies have been in the headlines recently, it’s not going to be Bitcoin, Ethereum, or any other cryptocurrency that will lead to long-term changes in the ways in which companies conduct transactions. Rather, it will be an underlying technology known as blockchain that will upend identity management, eliminate a host of intermediaries to provide a single set of facts, establish trust between parties that have no inherent trust, and enable a wave of new applications and business automation. While blockchain platforms are still in the early stages of development, companies and their partners should start evaluating the technology now with an eye toward identifying use cases that will yield real business value in the years to come.
A blockchain is a decentralized log of digital records. Think of it as a trusted ledger, with distributed nodes that are synchronized and time-stamped whenever a single record is updated. A public blockchain is accessible to anyone who wishes to participate, whereas a private blockchain requires an invitation to take part and is validated in advance. Records stored on a blockchain can include information about people, companies, assets, transactions, contracts, or practically anything that can be described with data. Because it’s very difficult to modify or corrupt the ledger, there is immutability of data and a very high degree of confidence in the information stored on a blockchain.
Blockchain use cases
While cryptocurrencies use public blockchain to record transactions, there are many other potential uses of the technology outside of this peer-to-peer value exchange.
For instance, in the healthcare field, Beth Israel Deaconess Medical Center in Boston and the MIT Media Lab created a proof-of-concept application called MedRec to track medications and maintain the integrity of electronic health records using a blockchain. In the future, blockchain could transform the ways in which hospitals, insurance companies, and medical suppliers share data, not only leading to better health outcomes for patients, but also reducing insurance fraud and counterfeit pharmaceuticals.
The technology could also bring efficiency to supply chains. A blockchain application known as a smart contract—basically, a contract defined in software code—could replace the tedious manual processes associated with vetting and onboarding new suppliers by allowing companies on a private blockchain to virtually “shake hands” on a smart contract and immediately start doing business. This will make it much easier for large corporations to do business with new suppliers, with none of the costs associated with agreeing to conventional contracts. It will also enable companies of any size to transact with large corporations, which will benefit small businesses and startups.
There are use cases in many other industries, including financial services, government, and manufacturing—essentially, any area that involves identity management, physical and digital asset management, or extensive use of intermediaries. IDC predicts global spending on blockchain solutions will reach $2.1 billion this year, led by spending in the financial services industry ($754 million), the distribution and professional services sector ($510 million), and manufacturing and resources ($448 million). Investment will grow at a staggering rate, reaching $6 billion by 2020 and $9.7 billion in 2021, according to IDC.
Removing intermediaries in financial blockchain
The financial services industry provides a perfect storm of factors for blockchain adoption. In addition to a high number of intermediaries, there are various requirements around identity authentication, privacy, security, reconciliation, transaction details, and fees. For example, a simple credit card charge requires five or more parties to complete, including the cardholder, merchant, acquirer, credit card network, and issuing bank. The parties collectively take 17 steps to complete the transaction over a one-week period, from the initial swipe to clearing and settlement. Of course, all parties have to be paid for their work, and this results in the retailer (or whoever sells the goods or services) receiving less money than the customer pays.
From a banking perspective, a private blockchain could clear out the intermediaries and transform the process to a one-step transaction between two banks that takes just one hour to clear, drastically reducing costs. Of course, bank A doesn't necessarily want bank B to have all of its customer information or proprietary modeling, but a blockchain provides some privacy while still allowing the transactions to happen.
There are other promising areas in the financial industry. A report from Goldman Sachs Equity Research predicted that blockchain could save $11 billion to $12 billion in fees, operational expenses, and capital charges in the clearing and settlement of cash securities globally. In the U.S. marketplace for title insurance, a blockchain-based system could save up to $4 billion annually by reducing errors and manual processes, according to the Goldman Sachs report.
The path to blockchain applications
Many companies have researched blockchain technologies and may even have ideas about potential use cases. But companies are worried that current platforms are immature and unproven for mission-critical applications, do not scale well, and lack resiliency.
They are absolutely right to be concerned. Significant issues need to be addressed before enterprise adoption can take place, including:
- Blockchains can't handle high transaction rates. The fastest existing blockchain can handle about 500 transactions per second, well below the level required for high-volume trading or payment systems. However, newer blockchain platforms claim significant improvements through changes in the consensus mechanisms being deployed.
- Sizing blockchain performance is difficult, which complicates hardware recommendations. The performance of a blockchain is very sensitive to the complexity of the smart contract or distributed application being executed.
- Blockchain platforms such as R3 Corda, Ethereum, and Hyperledger are still in the initial stages of development. Some firms may be reluctant to make an early bet on a platform with ambiguity around the feature set or development timeline.
- A lack of internal blockchain knowledge and developer talent.
- Uncertainty about how to evaluate extended value chains and business processes that touch competitors, suppliers, and customers.
- Data and integration challenges—if the data is not correct, the blockchain will represent erroneous information.
- Questions about how blockchain can be integrated into existing IT systems.
For these and other reasons, we expect 2018 to be a transitional year as companies continue to wrap their heads around blockchain and research potential use cases. Actual implementations will come later, starting in 2019. To avoid investments in hardware, early blockchain experiments will likely take place on pay-per-use models such as public cloud. While this will allow projects to scale, companies will have to contend with issues related to costs, security, data privacy, compliance, and vendor lock-in.
In the meantime, what should companies do to prepare for blockchain? Now is a good time to start evaluating use cases. Vendor or conference workshops can help educate IT and line-of-business executives to what blockchain can do today and get started on documenting the processes for specific use cases.
Workshops are an opportunity to get both internal and external parties involved. Generally speaking, companies wouldn't use a blockchain inside an organization. A stronger value proposition is provided by a consortium blockchain that crosses multiple organizations, which establishes a trusted mechanism for recording transactions, implementing smart contracts, and building other blockchain applications.
A workshop can not only identify suitable processes and the parties involved, but also try to identify what the value is to all parties. Something that is enormously valuable to party No. 1 may end up costing party No. 2 money. If that’s the case, the first organization will have to find a way to make adoption attractive to the second party, which might require identifying cost savings, faster reconciliation, or a better experience for staff or customers.
Moving forward with blockchain
After the workshop exercise, there are two paths forward:
- Platform and skills evaluation. This involves assessing which blockchain platform is most suitable, choosing a public or private blockchain, understanding transaction rates, and determining the skills required to develop smart contracts or distributed applications.
- Establish a proof of value (POV). This is not a blockchain process, but rather a working model that the organization can tweak in order to validate the business value. POVs typically demonstrate whether or not blockchain has the potential to deliver quantifiable business value based on one or two use cases using the company’s own data, at its own site or in a test environment.
Most companies will do the POV on a public cloud. No one wants to buy loads of hardware to try something that might ultimately be discarded or significantly changed.
That said, a POV can certainly inform discussions about data sovereignty and other requirements, which will drive decisions about infrastructure in the future. It’s important to keep in mind that the performance of the infrastructure will ultimately be coupled to the complexity of the blockchain application.
The distributed consensus model that underlies the blockchain model has the potential to create a trusted, universal platform to connect organizations, people, and machines. While the technology is not yet ready for enterprise adoption, this will change as platforms become stable, scaling and performance issues are addressed, and infrastructure needs are better understood. In the meantime, organizations need to understand how blockchain will impact their industries and determine where the opportunities lie to leverage blockchain.
Blockchain: Lessons for leaders
- A blockchain is a decentralized ledger of digital records that’s very difficult to modify or spoof.
- Blockchain promises to clear out inefficient processes based on identity management and excessive numbers of intermediaries.
- Current blockchain platforms are unproven for mission-critical applications, but that will soon change. In the meantime, companies should think through potential use cases and start experimenting.
- For companies considering blockchain applications, it’s crucial to establish a proof of value, a working model that can help validate the business value.
This article/content was written by the individual writer identified and does not necessarily reflect the view of Hewlett Packard Enterprise Company.