Blockchain Applications (II): Business Models
In the first part of this article, we had a look at some basic principles behind blockchain technology. Nice, but…so what? Why are so many companies investing and experimenting with it?
A framework for blockchain adoption
In early 2017, two researchers fromHarvard Business School (Marco Iansiti and Karim R. Lakhani) proposed an analysis framework for blockchain adoption (figure below, from the webinar “The Truth about blockchain”), based on two dimensions: degree of novelty and complexity. The first dimension represents the level of novelty of the application: the more innovative and further away from other existing business models, the higher the effort needed to explain it to customers and establish adoption. The complexity dimension focuses on the level of coordination that needs to be established in the ecosystem where the application is introduced, in order to produce value.
Built from the analysis of other foundational technologies (TCP/IP is used as an example in the study) and their evolution, the model identifies four quadrants where applications can be positioned:
- Single use: low novelty and low complexity, the application does not require large user networks to be created but can produce value with limited adoption. It’s the simplest application model; Bitcoin is an example of single use
- Localisation: high novelty and low complexity. Applications in this quadrant still offer a good chance to succeed even with a limited number of users. Financial institutions are applying this application model for automating and integrating traditional financial transactions across a diverse set of customers, replacing paper-based and/or manual processes
- Substitution: low level of novelty and high level of complexity. This quadrant contains applications that aim to change the way an entire industry conducts its business practice: this requires strong changes in adopting organisations (who need to reengineer their business processes around the new application) and a high level of coordination among participants in a value chain.
- Transformation: high level of novelty and high level of complexity. This pertains to applications that, if successful, could change the nature of economical, social and political systems. They involve coordinating the activity of several different actors across different value chains, and also institutional (and political) agreement on standards and processes
The framework can be used to analyse and determine the level of effort needed to introduce a new application.
Applications
Blockchain is a foundation technology, capable of supporting several solutions; nevertheless, there are some defining elements that make some applications more suitable than others for it.
In order to assess if an application could benefit from blockchain technology, some key elements should be present:
- Business network: the application should involve a network of participants. The network could be built of participants that are either within the same organisation or across different organisations (enterprise blockchain), or individual consumers (public blockchain)
- Transaction based: the use case addressed by the application should be transactional
- Consensus: participants must accept to validate transactions based on consensus (i.e. not based on other legal mechanisms)
- Provenance: the application added value could be based on provenance validation, i.e. there must be an advantage in keeping an audit trail of all transactions
- Immutability: the application should require transactions to be recorded with a tamper-proof mechanism
The presence of a business network is an essential element: if confirmed, together with at least one of the others, the application has good chances to be successfully implemented using a blockchain based solution.
Benefits for the Enterprise
Blockchain applications can be used in a wide range of business sectors: researchers estimate that it will take another 5 to 10 years to exploit its full potential. When applied to an existing business model, blockchain applications can produce benefits such as:
- Simplicity: simplification of processes, higher integration between processes from different entities
- Traceability: transactions can easily be traced, and the immutability of the ledger ensures attribution and proof of transactions
- Increased performance: processes can be integrated and automated, resulting in a increase performance in operations and other activities
- Stronger relationship: higher process integration and simplification implies the creation and sustainment of stronger relations with other stakeholders (es.: participants to the same supply chain)
Looking at Porter’s value chain model (a simplified diagram is shown below), there are several enterprise activities that could benefit from blockchain applications.
In an enterprise context, each area of the value chain can be implemented by one or more departments, with a high degree of independence. This leads to the creation of an ecosystem (the corporation value chain) where executing each activity requires a high degree of coordination between the various entities (departments, directorates, branches, sections, etc…) of the firm. If the ecosystem is large enough, these entities can constitute the business network mentioned requisite for blockchain application.
All activities in the enterprise value chain can benefit from the introduction of the technology, but remarkable improvements could be obtained in:
- Inbound and outbound logistics: further integration with suppliers result in a leaner and tightened supply chain
- Operations: any operation is based on a workflow, which produces a record of performed actions and a need for coordination. These attributes can benefit from the introduction of blockchain applications, with improved coordination and better traceability
Depending on the business sector and the intended application, the entire business model can be radically affected by the introduction of a distributed ledger; new applications can be conceived, depending greatly on the business sector of the corporation.
Business models
Despite its relatively short age, a number of companies have been experimenting with blockchain technology; some examples:
- Ripple and Stellar, providing solutions for financial institutions;
- Chain, attempting to establish a network of distributed public ledgers for business applications;
- Wave, proposing solutions for supply chain optimisation based on blockchain;
The range of applications is yet to be defined; the figure below (taken from a blog article on ACI Worldwide) shows some major ones:
We can identify the following major areas:
- Digital Currency and Fraud reduction: more mature applications such as digital currencies and e-Commerce can be found in this category; referring to the adoption framework (par. “A framework for blockchain adoption” above), they can generally be positioned in the areas Single Use or Localisation
- Record keeping: applications such as supply chain optimisation or proof of identity have high potential, but require a more substantial coordination between players; applications in this category can be positioned in the areas Localisation or Substitution
- Securities: applications such equity and derivatives automation can be positioned in the areas Localisation or Substitution
- Smart Contracts: some applications in this area (such as digital rights management) represent more advanced use cases and will probably require more research
Our own attempt to position these applications in the blockchain adoption model is reported in the figure below:
Some comments on the above diagram:
- most financial applications (in red) present a relatively low level of novelty, but require a high level of coordination between market players for their successful introduction (Localisation quadrant). This could justify the current strategic attitude of many financial institutions, which have been heavily investing in the technology but have yet to introduce applications on the market
- many applications imply the introduction of new business models to low complexity scenarios (es.: loyalty programs), in the Substitution quadrant. These applications represent new interpretations of older models, and present higher chance of success (due to the low level of complexity)
- there is a relatively low number of applications in the Single Use quadrant. This can be justified observing the relative maturity of digital currencies (the most mature application of blockchain)
The way ahead
Blockchain is a foundation technology and has potential to revolutionise the way corporations conduct business online and offline, with the same disruptive perspective that the introduction of TCP/IP had for the internet in the 1980s. It is receiving increasing attention, while more research proves the benefits and potential business applications and new players emerge on the market with new application proposals.
It might take several more years before the changes required by a structured adoption of the technology will start to produce effects; but the current perspective seem to confirm that it will drastically change the structure of online communications.
We proposed an overview of the technology foundation, and a framework to assess the adoption of the technology in support of several applications. Due to the lack of consolidated research and other established sources, it is mostly based on the analysis of Internet resources and the few research articles available online.
The application of the framework to sample applications provides a way to evaluate its the potential of the technology in support business decision-making.
Do you agree with our assessments? Are you aware of other major applications of blockchain? Or an upcoming player in the market? Let us know in the comments down below!
