The Viability of Enterprise Blockchain beyond Financial Services

the-viability-of-enterprise-blockchain-beyond-financial-services

In a flurry of blockchain investment, activity, and hype, and hyperbole, enterprises are left wondering: Is a “protocol-based” trust system actually viable for business?

In 2015 and 2016, blockchain, the distributed ledger technology born of Bitcoin, enjoyed a blossoming beyond cryptocurrency and logging financial transactions, to an architecture capable of supporting the logging of events. The ability to log events like signing a document, casting a vote, transferring energy units, and sensor data thresholds, among others, renders blockchain an attractive architecture for countless use cases. The expansion of blockchain’s application from currency-based into events-based transactions turned heads across all industries, from automotive to healthcare, manufacturing, energy, and beyond.

But while the blockchain market has generated massive interest and investment from just about every type of institution, the reality today is that enterprise blockchain applications are extremely nascent with very few deployments in production outside of Bitcoin. Whether deciding to jump on the bandwagon, or write it off as hype, businesses are well advised to first understand what blockchain is (and is not), as well as how blockchain technologies could support their core objectives and long-term strategies. Is there a real business opportunity in blockchain?

Significant and Widespread Potential for Cost Savings

Efficiencies can emerge when code (not people) intermediates transactions. The current models for processing transactions that involve numerous stakeholders are relegated to “intermediary” industries of people responsible for reconciling details manually. Inefficiencies exist at every level in these structures, not just because of high complexity, low trust, variations across jurisdictions, or human error, but because of risks of fraud, tampering, and insecurity. Extraneous costs are entangled in a convoluted mix of processing fees, labor, systems management, investigations, regulatory penalties, and waste, not to mention time and locked-up liquidity.

Tractica defines a blockchain as a decentralized, distributed ledger wherein financial and operational transactions are recorded across and verified by the network, rather than a single central authority. Using blockchain technologies, input data can be immediately processed in blocks and verified across a network of nodes, and then via smart contracts, they can trigger additional services. To streamline intermediation, transactions can be registered and authenticated from permissioned users, devices, or events. Across industries, there is significant opportunity to automate functions that would facilitate a host of process and operational efficiencies and cost savings. Below is a partial list of efficiencies that apply to numerous industry verticals.

  • Transaction reconciliation and settlement
  • User/customer/patient data transfer
  • Title/ownership transfer
  • Access and identity authentication
  • Fraud mitigation
  • Regulatory compliance
  • Multi-party risk reduction

Within each of these areas, there are cost efficiencies to be gained in fewer systems, lower headcount, less infrastructure, and reductions in fraud, non-compliance, and risk. Through this lens, enterprises must also understand that blockchain is not a panacea. Rather, businesses should view this technology as a series of technological modules and concepts that may be selectively chosen and applied, and/or will complement other emerging technology trends. This justifies the intense activity blockchain has seen in the last 18 months.

There are several rival initiatives being developed around the settlement challenge alone. Setl, a London-based group founded by hedge fund investors and trading executives last year, launched its OpenCSD platform to settle financial market payments with digital cash linked directly to central banks. Citigroup is working on its own “Citicoin” solution, while Goldman Sachs has filed a patent for a “SETLcoin” to allow trades to be settled near-instantaneously. JPMorgan, Credit Suisse, Barclays, and others are also working on similar projects.

Another signal of market potential is the fact that two of the world’s leading enterprise technology providers, IBM and Microsoft, are working to develop and integrate blockchain technologies and modules into their existing enterprise technology suites. In September 2016, IBM boasted it had more than 300 blockchain engagements underway across a range of industries, notably finance, logistics, retail, agriculture, and real estate. Microsoft has partnered with numerous blockchain application providers supporting development in energy, healthcare, the Internet of Things (IoT), information technology (IT), and others.

New Revenue Structures Emerging in a Blockchain-Enabled Economy

While cost savings may be the more obvious benefit of blockchain technology, Tractica’s research finds that incremental and net new revenue could emerge, albeit over a longer time period, as blockchain infrastructures make possible the following innovations:

  • New modes of interactions and transactions (e.g., companies have visibility into processes previously blind to them; devices negotiate for themselves; peer-to-peer transactions may be leveraged while maintaining security/privacy)
  • New modes work in conjunction with other emerging technology trends (e.g., shared economy, artificial intelligence (AI), IoT, autonomous vehicles, 3D printing, etc.)
  • Third-party services (e.g., payment, microinsurance) using blockchain
  • Increased liquidity enabled through the automation of transactions and reduction of latency can be used to support new business models

For example, if a network of companies uses a distributed architecture to monitor, negotiate, distribute, track, and generally manage the provenance of products, visibility into these previously fragmented or invisible steps of the supply chain could open up new means of providing value to each other or to end customers.

Companies like SolarCoin are enticing users to buy into solar energy for rewards in SolarCoins, which can be cashed in. They are also beginning to look at ways of monetizing this data, effectively registering temperature data collected via the sensors from solar panels to supplement applications such as weather modeling to drive new revenue streams. Contextual data sourced along the chain, through sensors for example, could become an asset supporting new revenue streams by securely procuring and selling insights around soil, livestock, weather, traffic, retail, recycling, and beyond.

Blockchain Adoption Challenges, Despite High Potential Enterprise Value

As opportune as blockchain-enabled cost savings and potential new revenue streams may sound, this technology faces numerous barriers before widespread adoption will occur. Unclear monetary regulations or shared (cross-border) policies are significant barriers to achieving anything close to a critical mass of adoption, and these are only the beginning, as illustrated by the barriers listed below:

  • Collaborative development (at the process, legal, and architectural levels)
  • Stakeholder governance development and accountability
  • Autonomous device governance
  • Regulatory rewrite, overhaul, development
  • Identity and privacy protections
  • Integration with incumbent systems
  • Multi-party adoption and the need for critical mass
  • Cultural and strategic hurdles (from centralized to decentralized operations)
  • Reputational hurdles (a nascent market associated with cybercrime)

Many of these barriers require collaborative decision making, governance, and even legislation to address them, which is no easy (or quick) task given the entrenchment in current business models, the complexity and/or volume of business transactions, or the pace of change in already heavily regulated industries.

Nonetheless, countless industry associations, communities, and consortia are emerging to foster development in this space. The Hyperledger project is one such consortium dedicated to providing open protocols and standards for blockchain componentry, such as identity, storage, permissioning, consensus, and contracts modules applicable to both public and private blockchains. Early participation in communities dedicated to fostering learning and experimentation with the technology are strategic vehicles for enterprises to scope their unique opportunities while identifying where and how they can address barriers to deployment.

Investing in the Future of Blockchain

Finally, as enterprises assess the blockchain opportunity within their 2 to 5 year strategies, they should also consider adjacent technological advancements and economic influences. In particular, massive investments and adoption momentum in areas such as AI, semi-conductor technology (IoT), cybersecurity, and others are rapidly growing today. Economic pressures driving energy, manufacturing, and intelligence gathering efficiencies are and will continue to influence business architectures and competitive structures. While blockchain may be earlier in the adoption curve than most technologies garnering investment today, we can be certain that current technological and economic trends will influence the course and pace of its application.

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