The Truth About Blockchain
The economic, legal, and political institutions of our society are defined in large part by the contracts, transactions, and records that document these aspects of human interaction. They safeguard assets and define the limits of the organization. They are responsible for establishing and verifying identities as well as keeping a log of events. They control the ways in which governments, organizations, communities, and individuals interact with one another. They serve as a compass for both administrative and societal action. Despite this, the essential tools and the bureaucracies that were developed to handle them have not kept up with the digital change that the economy has undergone. They are comparable to a traffic jam that prevents a Formula One race car from moving forward. In a digital environment, the method by which we govern and keep administrative control must undergo significant shifts.
Blockchain technology may offer a solution to this issue. Blockchain is the technology that underpins bitcoin as well as other virtual currencies. It is an open, decentralized ledger that can record transactions between two parties in a form that is both verifiable and permanent. It is also possible to program the ledger such that it will perform transactions without human intervention. (For further reading, see the sidebar titled “How Blockchain Works.”)
The Workings of a Blockchain
The following are the five fundamental principles that underlie the technology: 1. …
With the use of blockchain technology, it is possible to conceive of a future in which contracts are encased in digital code and kept in open, distributed databases, where they are safe from being altered, deleted, or otherwise altered in any way. In this hypothetical future, each and every agreement, process, task, and payment would be accompanied by a digital record and signature that could be recognized, verified, saved, and distributed. There is a possibility that intermediaries like as lawyers, brokers, and bankers will no longer be required. People, businesses, computers, and even algorithms would all be able to freely trade with one another and communicate with one another with very little difficulty. This is the enormous potential offered by blockchain technology.
In point of fact, nearly everyone has become familiar with the assertion that blockchain technology will transform commercial enterprises as well as economies. Despite the fact that we are excited about its possibilities, we are concerned by the buzz around it. We are concerned about more than only security flaws (like the hacking of several other bitcoin exchanges in recent years and the closure of one bitcoin exchange in 2014). According to what we’ve learned from researching technical progress, in order for there to be a revolution centred around blockchain technology, a number of obstacles, including those pertaining to technology, government, organisations, and even society, will need to be overcome. It would be unwise to dive headfirst into the innovation of blockchain technology without first having a solid knowledge of how the technology is most likely to catch on.
We believe that it will be several years before we see a genuine blockchain-led transformation of both businesses and governments. This is due to the fact that blockchain is not a “disruptive” technology, which is a type of innovation that can challenge an established business model by offering a lower-cost alternative and soon overrun established businesses. The blockchain is a foundational technology, meaning that it has the ability to provide new foundations for our social and economic institutions. However, despite the immense influence that blockchain technology will have, it will be decades before it is fully integrated into our societal and economic systems. As waves of technical and institutional change acquire strength, the process of adoption will be slow and steady rather than sudden. This realisation and the strategic repercussions it has will be the focus of our discussion in this article.
Patterns of People’s Adoption of New Technologies
Before we dive headfirst into blockchain investment and strategy, let’s take a moment to consider what we already know about the process of technology adoption and, in particular, the transformation that is characteristic of other foundational technologies. One of the most pertinent examples is the technology behind distributed computer networking, which can be seen in the implementation of TCP/IP (transmission control protocol/internet protocol), which paved the way for the creation of the internet and was one of the protocols that underpinned its operation.
TCP/IP was first successful in a single-use case when it was first introduced in 1972. This use case was serving as the foundation for e-mail communication between researchers working on ARPAnet, which was the predecessor to the commercial internet. Before the development of TCP/IP, the architecture of telecommunications was based on a method known as “circuit switching.” This method required connections between two parties or machines to be preestablished and maintained throughout an exchange. Telecom service providers and equipment manufacturers had invested billions of dollars in the construction of dedicated lines to guarantee that any two nodes could connect with one another.
The TCP/IP protocol completely upended that concept. The new technique for transmitting data did so by first digitising the data and then chopping it up into very small packets, each of which contained information about an address. Once the data packets were sent out into the network, they were free to travel any path they pleased to reach their destination. Intelligent transmitting and receiving nodes at the network’s edges were able to dismantle, reassemble, and interpret the encoded data in the packets they sent and received. There was no requirement for exclusive private lines or a significant amount of infrastructure. TCP/IP was responsible for the creation of a public network that is openly shared and does not have a central authority or party accountable for its upkeep and development.
TCP/IP was met with suspicion from the traditional telecommunications and computing industries when it was first introduced. Few people thought that robust connections for data, message, voice, and video could be formed on the new architecture, and even fewer thought that the system that went along with it could be secure and scale up. However, during the late 1980s and throughout the 1990s, a rising number of companies, including Sun, NeXT, Hewlett-Packard, and Silicon Graphics, employed TCP/IP in part to construct localised private networks within their respective enterprises. In order to accomplish this goal, they developed fundamental building blocks and tools that extended its use outside the realm of electronic mail, gradually supplanting more traditional local network technologies and standards. The adoption of these fundamental building blocks and techniques led to significant increases in productivity across a variety of companies.
The development of the World Wide Web in the middle of the 1990s marked the beginning of widespread public use of the TCP/IP protocol. The “plumbing” — the gear, software, and services required to connect to the newly public network and exchange information — was soon provided by a slew of new technological companies that sprang up almost immediately. Web browsers, web servers, and various other tools and components that assisted in the creation and acceptance of internet services and applications were all marketed by Netscape and sold to customers. The development of the application programming language known as Java was spearheaded by Sun. Infoseek, Excite, AltaVista, and Yahoo all came into being as a direct result of the exponential growth of information available on the World Wide Web.
As soon as this fundamental infrastructure reached a critical mass, a new generation of firms took advantage of low-cost connectivity by developing internet services that were compelling alternatives for pre-existing enterprises. These businesses competed successfully in their respective markets. CNET has relocated its news coverage online. Amazon had a larger selection of books available for purchase than any other bookstore. The procedure of purchasing plane tickets has been made much more transparent because to companies like Priceline and Expedia, which made the process more simpler. Traditional industries, such as newspapers and brick-and-mortar merchants, were put under a tremendous amount of pressure as a result of the capability of these entrants to obtain enormous reach at relatively little cost.
The next wave of firms relied on widespread internet connectivity to develop original, game-changing applications that fundamentally altered the way businesses created and captured value. These applications were created by businesses that were part of the next wave of companies. These businesses were founded on a novel peer-to-peer architecture and derived their value from the coordination of user networks that were scattered across the internet. Think about how eBay changed online retail through auctions, how Napster changed the music industry, how Skype changed telecommunications, and how Google changed web search by utilising user-generated links to provide more relevant results. All of these companies revolutionised their respective industries.
Blockchain technology is already being used by businesses to track things as they move through intricate supply chains.
Ultimately, it took more than 30 years for TCP/IP to proceed through all the phases—single use, localised usage, substitution, and transformation—and restructure the economy. More than half of the most valuable public firms in the world today have business models that are driven by the internet and based on platforms. The core pillars upon which our economy is built have been upended. Physical scale and one-of-a-kind intellectual property do not confer unbeatable advantages as they once did. Rather, businesses that act as “keystones” and proactively organise, influence, and coordinate widespread networks of communities, users, and organisations are increasingly becoming the economic leaders.
The New Building Structure
In October 2008, blockchain, which is a peer-to-peer network that sits on top of the internet, was introduced as part of a proposal for bitcoin, a virtual currency system that eschewed the use of a central authority for issuing currency, transferring ownership, and confirming transactions. Blockchain was developed as a component of the bitcoin proposal. Blockchain technology was initially implemented in Bitcoin as the first decentralised digital asset.
There are striking similarities between blockchain technology and the TCP/IP protocol. In the same way that e-mail made bilateral communication possible, bitcoin makes bilateral financial transactions possible. Similar to how TCP/IP was developed and maintained, blockchain development and maintenance is open, decentralised, and collaborative. The core software is maintained by a group of volunteers from all around the world. And just like e-mail, bitcoin was initially adopted by a community that was passionate about it but was still very small.
TCP/IP made previously inaccessible economic value available by drastically reducing the expenses associated with establishing connections. In a similar vein, blockchain technology might make it significantly cheaper to conduct transactions. It is conceivable that it will eventually replace all other record-keeping systems for transactions. If something like that occurs, the economy will go through another period of profound change as new sources of power and control that are based on blockchain technology emerge.
Think about how things are done in business nowadays. Maintaining accurate and up-to-date records of financial dealings is essential to the operation of any firm. These records monitor actions and performance in the past and serve as a guide for preparing for the future. They offer a perspective not just on the internal workings of the business but also on the relationships the organisation maintains with its external stakeholders. Every organisation maintains its own records, and those documents are kept in strict confidence. A great number of organisations do not have a master ledger that details all of their operations; rather, records are dispersed among many organisational units and functions. The problem is that reconciling transactions between individual and private ledgers takes a significant amount of time and is rife with opportunities for error.
A normal stock transaction, for instance, can be completed in a matter of microseconds, frequently with no involvement from a human being. However, the settlement, which involves the transfer of ownership of the stock, might take up to a week to complete. Because the parties do not have access to one another’s ledgers, they are unable to automatically check that the assets are in fact owned and can be transferred. This is the reason why this situation exists. Instead, as the record of the transaction travels from one organisation to the next and the ledgers are individually updated, a sequence of intermediaries acts as guarantors of the assets that are being transferred.
In a system that uses blockchain technology, the ledger is duplicated in a huge number of databases that are similar to one another. Each of these databases is hosted and maintained by a different interested party. When changes are made in one copy, those changes are immediately reflected in all of the other copies as well. Therefore, as transactions take place, records of the value and assets that are being traded are put into every ledger so that they are not lost. There is no requirement for the involvement of a third party in the verification or transfer of ownership. If a stock transaction were to take place on a system that was built on blockchain, it would be settled within seconds while remaining secure and verifiable throughout the process. (The notorious hacks that have hit bitcoin exchanges found holes not in the blockchain itself but in separate systems that were tied to parties that were using the network.)
A Plan for Distributed Ledger Technology Implementation
If bitcoin may be compared to early forms of email, then is blockchain technology still decades away from realising its full potential? The answer, in our opinion, is yes, but with certain qualifications. We are unable to provide an accurate estimate of the number of years that will be required for the transformation; however, we are able to speculate as to which categories of applications will be the most successful initially and how blockchain technology will eventually achieve widespread acceptance.
How the Most Important Technologies Get Their Footing
According to our investigation, the past provides evidence that two dimensions influence the development of a foundational technology and the business use cases that it enables. The first factor is an application’s degree of originality, or how recently it was introduced to the market. To ensure that users are aware of the issues that are addressed by the solution, further work will be required if the solution is unique. The second dimension is complexity, which is reflected by the level of ecosystem coordination that is required. This refers to the number and variety of parties that need to cooperate with one another in order for the technology to produce value. For instance, a social network with only one member is of very little utility; in order for a social network to be worthwhile, a significant number of your own contacts need to have joined it. In order to make the application valuable for all parties, additional users of the application need to be recruited. The same thing is going to be true for numerous applications of blockchain technology. And as the scope of those applications and the influence they have grows, the adoption of those applications will call for major institutional transformation.
A framework that maps innovations against these two contextual dimensions, and then divides them into quadrants, has been developed by our team. (For further information, check out the display on “How Foundational Technologies Take Hold.”) Each quadrant illustrates a different phase in the evolution of technology. Executives will be better able to understand the types of challenges that a blockchain innovation presents, the level of collaboration and consensus that is required for it, and the legislative and regulatory efforts that it will require if they can determine which category the innovation falls into. The map will also make suggestions for the kinds of processes and infrastructure that need to be built in order to make it easier for people to accept the innovation. Managers can use it to assess the state of blockchain development in any industry, as well as to evaluate strategic investments in their own blockchain capabilities.
Single usage.
Applications with low levels of innovation and low levels of coordination that produce better, less expensive, and highly focused solutions are located in the first quadrant. E-mail, which is a more cost-effective alternative to traditional communication methods such as phone calls, faxes, and traditional mail, was first a single-use application for TCP/IP (even though its value rose with the number of users). Bitcoin is another cryptocurrency that fits into this sector. Even in its first days, bitcoin delivered immediate value to the few people who used it solely as an alternative payment method. These early adopters were able to profit from the cryptocurrency very immediately. (You may think of it like a complicated email that sends not just information but also actual value.) It was anticipated that the total value of bitcoin transactions will reach $92 billion by the end of 2016. That is still a rounding error in comparison to the $411 trillion in total worldwide payments, but bitcoin is developing rapidly and becoming increasingly essential in contexts such as immediate payments as well as dealing in foreign currencies and assets, where the existing financial system has constraints.
Localization.
The second quadrant is comprised of inventions that have a pretty high level of originality but require just a limited number of users to provide immediate value. As a result, it is still very simple to encourage the adoption of these ideas. If the evolution of blockchain technology follows the same trajectory as that of business networking technologies, then we can anticipate that future innovations in blockchain will build on applications designed for a single use to produce local private networks on which multiple organisations are connected through a distributed ledger.
Because the majority of the early private blockchain-based development is taking place in the financial services industry, frequently inside tiny networks of enterprises, the requirements for coordination are rather low. In order to provide a platform that is capable of processing and confirming financial transactions, Nasdaq is collaborating with Chain.com, one of the numerous blockchain infrastructure providers. In areas such as trade finance, foreign exchange, cross-border settlement, and securities settlement, financial institutions such as Bank of America, JPMorgan, the New York Stock Exchange, Fidelity Investments, and Standard Chartered are conducting trials of blockchain technology as a potential replacement for paper-based and manual transaction processing. The use of a digital currency known as CAD-coin for interbank transfers is now being evaluated by the Bank of Canada. We predict a rise in the number of private blockchains that are tailored to the requirements of a variety of sectors and companies.
Substitution.
The applications in the third quadrant have a relatively low level of novelty since they build on previously developed single-use and localised applications. On the other hand, these applications have a high level of coordination needs because they involve increasingly public uses. These technologies intend to completely supplant established corporate practises. However, there are significant challenges associated with their implementation. Not only do they call for increased coordination, but the procedures that they want to supplant may already be fully developed and firmly ingrained within institutions and organisations. Cryptocurrencies, which are new, fully formed currency systems, are one example of an alternative. These currencies have grown out of the basic payment mechanism that bitcoin originally provided. The most important distinction is that a cryptocurrency necessitates the adoption of its system by all parties involved in monetary transactions. This poses a challenge to governments and institutions that have traditionally managed and supervised such transactions. Consumers, too, will need to adjust their behaviour and get familiar with the new capabilities offered by cryptocurrencies before they can fully take use of these innovations.
A recent experiment carried out at MIT sheds light on the difficulties that lie ahead for systems of digital currency. In 2014, the MIT Bitcoin Club gifted one hundred dollars’ worth of bitcoin to each of the undergraduate students at MIT. It is interesting to note that thirty percent of the students did not even sign up to receive the free money, and twenty percent of those who did sign up turned their bitcoin into cash within a few weeks of signing up. Even technically skilled people had a difficult time understanding how to utilise bitcoin or where it could be used.
Stellar, a nonprofit that aims to bring affordable financial services such as banking, micropayments, and remittances to people who have never had access to them, is one of the most ambitious blockchain applications that can be used as a substitute. Stellar is one of the most ambitious blockchain applications that can be used as a substitute. Stellar has its own virtual currency called lumens, and it also enables users to save a variety of assets, such as other currencies, telephone minutes, and data credits, on its system. Lumens are Stellar’s in-house currency. In the beginning, Stellar concentrated its efforts on Africa, more specifically Nigeria, which is home to the continent’s largest economy. It has demonstrated that it is cost-effective and has achieved strong adoption within the group that it was designed to serve. However, because there are many obstacles to overcome in terms of ecosystem cooperation, its future is far from guaranteed. Stellar’s viability has been proven by its widespread use in the grassroots cryptocurrency community, but in order for it to become a financial standard, it will need to influence government policy and convince central banks and other large organisations to adopt it. It’s possible that this will take several years of consistent effort.
Additional Resources
Transformation.
The final quadrant is comprised of wholly original applications that, in the event that they are implemented successfully, have the potential to radically alter the character of existing economic, social, and political structures. They include achieving institutional consensus on procedures and standards as well as managing the activities of a large number of different players. Their implementation will call for significant alterations to existing social norms, legal structures, and political systems.
It’s possible that “smart contracts” are the most game-changing application of blockchain technology at the present. When the conditions that have been negotiated are satisfied, these automate payments and the transfer of currency or other assets. A supplier, for instance, might automatically get payment from a smart contract the moment a shipment arrives at its destination. A company may send a message to the blockchain to indicate that a certain item has been delivered, or the item itself could be equipped with GPS capability that would report a location update automatically and, in turn, trigger a payment. In the fields of venture capital funding, banking, and digital rights management, we have already witnessed a few early trials with self-executing contracts.
The repercussions are really interesting to consider. Contracts are the foundation on which businesses are created, from the initial incorporation through the buyer-supplier ties to the employee relations. What will happen to existing firm structures, processes, and middlemen like lawyers and accountants if contracts are automated in the future? What about those in managerial positions? All of their positions would be significantly altered. However, before we get too excited about this particular topic, it is important to keep in mind that the widespread use of smart contracts is still many decades away. For one thing, they need the support of relevant institutions in order to be effective. It will be necessary to have a significant amount of coordination as well as clarity around the process of designing, verifying, implementing, and enforcing smart contracts. We are of the opinion that the institutions that are responsible for such arduous responsibilities will require a significant amount of time to mature. The technological obstacles, particularly those pertaining to security, are quite difficult.
Providing Direction for Your Approach to Investing in Blockchain
What kinds of considerations should leaders make about blockchain technology for their own companies? Our approach can assist businesses in determining which possibilities are most suited for them.
Single-use applications are typically the best starting point for most people because they pose the least amount of danger possible due to the fact that they aren’t brand new and require little cooperation with third parties. One tactic could be to start accepting bitcoin as a form of payment. The infrastructure and market for bitcoin are already highly developed, and using the virtual currency will push a number of activities, including IT, finance, accounting, sales, and marketing, to build blockchain capabilities. Moreover, the market for bitcoin is already rather developed. Another low-risk strategy is to use blockchain internally as a database for applications such as maintaining physical and digital assets, recording internal transactions, and verifying identities. This approach can also be used by organisations that are interested in keeping their data private. It’s possible that this will prove to be an especially helpful solution for businesses that are having trouble reconciling their different internal databases. Putting one-time use programmes through their paces will assist companies in developing the skills necessary to work with more sophisticated software. Experimentation is becoming much simpler as a result of the proliferation of cloud-based blockchain services offered by both start-ups and established platforms like as Amazon and Microsoft.
The development of locally optimised software applications is the logical next step for businesses. At the moment, there is a lot of money going into private blockchain networks, and the projects that are a part of these networks appear to be set for considerable short-term effect. Companies that provide financial services, for instance, are discovering that the private blockchain networks they’ve built up with a restricted number of trustworthy counterparties can drastically cut the expenses associated with conducting transactions.
Through the use of localised applications, businesses also have the ability to address particular challenges posed by transactions that span borders. For example, some businesses have already begun utilising blockchain technology to track things as they move through intricate supply chains. The diamond business is going through this process right now, tracking diamonds all the way from the mines to the end users. These kinds of experiments can now be performed with readily available hardware and software.
Creating apps that are a suitable replacement for an existing solution takes considerable thought because the previous solution may be difficult to remove. One strategy could be to concentrate on finding replacements that won’t need end users to make major changes in their behaviour but will offer alternatives to solutions that are either expensive or unattractive. In order to gain popularity, alternatives need to deliver functionality that is on par with that of a traditional solution, and they also need to be simple enough for the ecosystem to easily absorb and embrace. An excellent illustration of an alternative that has been carefully explored is First Data’s recent push into blockchain-based gift cards. By using blockchain to track the flows of currency within accounts—without relying on external payment processors—retailers who offer them to customers can drastically reduce their costs per transaction while also increasing their level of security, both of which are significant benefits for consumers. These brand-new gift cards even make it possible to transfer balances and conduct transactions between different retailers by utilising a shared ledger.
Blockchain has the potential to reduce the fees associated with financial transactions while also reshaping the economy.
There hasn’t been much progress made toward transformative applications. However, it makes sense to analyse their potential now and engage in the research and development of technologies that can make them a reality. They will be most effective when coupled with a new business model in which the logic of value creation and capture diverges from the ways that are now in use. These types of business models are difficult to implement, but they have the potential to unlock future growth for firms.
Think about the ways in which law firms will need to adapt in order to make smart contracts a reality. They will need to acquire new skills in computer programming, including blockchain technology. They will most likely need to reevaluate their hourly payment model and consider the possibility of collecting transaction or hosting costs for contracts, to mention just two possible options among many others that may be taken. Before making any changes, executives need to make sure that they have a thorough understanding of the ramifications of the business model and that they have tested this understanding.
The implementation of transformative scenarios will take the most time, but they will produce the greatest returns. Large-scale public identity systems for functions like passport control and algorithm-driven decision making in the prevention of money laundering and in complex financial transactions involving a large number of parties are two areas in which they could have a significant impact. Both of these areas are examples of situations in which they could be used. We anticipate that it will be at least another decade before these applications achieve widespread adoption and critical mass, and most likely even longer than that.
The proliferation of transformative applications will also result in the emergence of new platform-level players who will be responsible for the coordination and governance of the emerging ecosystems. The following generation’s equivalents to Google and Facebook will look something like this. To take advantage of such possibilities, you will need to exercise patience. Even while it may be too soon to begin making large expenditures in them at this time, it is nevertheless a valuable endeavour to establish the necessary foundations for them, which include tools and standards.
CONCLUSION
TCP/IP has very certainly paved the path for blockchain’s widespread use, in addition to offering a useful model that can serve as a guide for its implementation. TCP/IP is now widely used, and blockchain applications are currently being developed on top of the digital data, communication, and compute infrastructure. This reduces the cost of experimentation and paves the way for the rapid development of new use cases.
With the help of our framework, leaders will be able to determine where to begin now in the process of creating their organization’s capabilities for blockchain. They need to guarantee that their staffs learn about blockchain, develop company-specific applications across the quadrants we’ve defined, and invest in blockchain infrastructure. Additionally, they need to ensure that they invest in blockchain infrastructure.
However, given the time horizons, hurdles to adoption, and sheer complexity needed in getting to TCP/IP levels of acceptance, CEOs should consider carefully about the dangers involved in experimenting with blockchain technology before moving forward with such endeavours. Obviously, gaining the experience necessary to think on a larger scale requires beginning on a smaller scale. However, the quantity of investment ought to be dependant on the nature of the business and the sector in which it operates. The adoption of blockchain technology by organisations providing financial services is already well under way. Production is not one of them.
There is a significant likelihood that blockchain will have some kind of an effect on your company regardless of the setting.
