Enterprise Blockchain Consortia: Challenges, Levers, and Questions from 2019.
From healthcare to finance, automotive to tax, Blockchain in 2019 saw announcements from many industries looking to capitalize on this general purpose technology. Compared to its previous year, 2019 was different in that its reports seemed to be more than publicity stunts or the news of yet another working group. Many blockchain enterprise press releases of 2019 referenced targeted use-cases.
- EY Launches Token and Smart Contract Testing Service in Open Beta (Dec. 18, 2019)
- US Health Insurance Giant Piloting Blockchain to Secure Medical Data (Dec. 13, 2019)
- ING working on digital assets custody technology (Dec. 11, 2019)
- Volvo Cars to implement blockchain traceability of cobalt used in electric car batteries (Nov. 6, 2019)
2019: A Year in Review
The end of the year is a good time to reflect. Understanding what we accomplished can lend clues and can inspire us towards achieving success in the coming year. Our year-end reflections include
- The most common challenge we helped enterprise blockchain consortia tackle in 2019.
- Two levers for enterprise blockchain consortia going forward.
- Three imperatives for blockchain consortia in 2020.
Reviewing project engagements and news from this year, I look to inspire future thought and conversation that may bring the industry one step closer towards capturing its potential.
Common Challenge for Enterprise Blockchain in 2019: Implementation Costs
Throughout 2019, we saw consortia hit roadblocks when it came to the cost of implementation.
While there are many known difficulties of implementing any new workflow or technology into existing business processes or replacing these processes altogether, we saw a number of enterprise projects in 2019 realize this the hard way.
This problem is always more difficult when the platform intends to bring together multiple types of stakeholders. When launching a system and designing incentives:
It is imperative to understand that different stakeholders have different resources, constraints, and preferences.
Whether preferences about control, intellectual property, price, or other economic factors, the market must be designed with both the supply-side and the demand-side in mind. When designing a system, for each choice one must ask:
Does this design choice assist or impede adoption by each type of participant?
For example, if a platform’s goal is to bring together buyers and sellers, then the needs of each of these groups must be investigated. There may be greater costs to implementing and integrating the technology for one side of the market. If differences are not addressed, then the market will fail because one side does not want to adopt.
Your design choices could assist or impede adoption for your target base.
For enterprise blockchain platforms, relevant design elements include:
- Use case selection.
- Mechanisms for channeling existing data into the new system.
- Service pricing.
- Adoption subsidies.
Identifying stakeholders, understanding their benefits, preferences, and importance to the system is crucial to the success of any platform. The design components of a platform, including incentives, fees, and subsidies are interrelated. In order to function properly and foster adoption, these parts of the system must be created in tandem to work together.
Which brings us to the biggest opportunity for blockchain consortia going into next year:
Two Levers for Enterprise Blockchain Going Forward
#1: First Principles Design
Economics is context specific. I repeat, economics is context specific. If you have ever been in or around a meeting with me, you have heard this phrase. That is because:
Economics is context specific.
One of the biggest learnings for projects from 2019 was that economics does not copy-paste well. While we can learn from the successes and failures of other projects, it is important to take those learnings and analyze them in the context of one’s own system. Using a mechanism that worked for a different blockchain platform is like attempting to copy the strategy of another company. It might work, but only if your firm has similar customers and resources and even then, it might not be the best strategy for you.
Unless the successful project you are hoping to emulate has identical stakeholders, use cases, and strategy, it is certain that design elements will impact each system differently. As a result, outcomes, implications, and best practices will vary. To hear about this more, please see our talk at SXSW.
When structuring and designing the economic system of a blockchain project, it is best to do so from the ground up with an understanding of how context and design interact. Learnings from social science areas from psychology to economics can facilitate design and indicate what is likely to work and what is likely to fail. Specializing in the economic areas of contract theory, market design, and the economics of information, we leverage decades of scholarship from the social sciences and apply insights to blockchain systems. We talk about this further here: Framework for Blockchain Economic Design.
Using a rigorous process can help facilitate high quality, context specific design. We implement the first-principles approach shown in the graphic below. The design that results from this process serves the needs of specific stakeholders, for the purpose it will be used and the strategy that the consortium is pursuing. The process also ensures that all of the elements of the platform design work together to form a coherent whole.
Enterprise projects must have an effective governance specified from Day 1. Most enterprise blockchain networks aim to align stakeholders that are not otherwise able to efficiently conduct business with each other as their goals, motivations, and preferences are at odds.
Governance is the system by which operational processes are updated, and when decisions outside the operational rules need to be made.
Elements of governance design include:
- Proposal processes.
- Voting rights and weights.
- IP rights.
For more on this, please read: What is Governance For?
If these issues have not been addressed in a transparent way, then it will be difficult to instill the level of confidence required to inspire future members to dedicate their resources to join a network. We talk about the importance of this further here: Framework for Blockchain Governance Design.
A blockchain system can be enticing for groups to join, but the moment that a decision or dispute that involves real money, value, ownership, or responsibility arises, there must be a process in place to address it. Structuring governance in a way that does not adequately serve the needs of all participants at a particular point in time is an easy way to crash a project and deter potential contributors from building.
Because early-stage consortia change relatively quickly, and aim to grow in membership. Their governance needs to be flexible as the consortium adds new members, who may sometimes have much different objectives than those who came before, yet firm enough to direct decision-making when there is disagreement.
Attempting to set or reset the rules to decide the fate of a decision after a conflict has arisen will often end poorly. Governance is difficult.
Effective governance is strategically vague.
As such, developing a robust governance system is not only challenging, but if overdrawn it can also impede the growth of a young nimble network. Foundational Governance, on the other hand, is just the right amount of governance that network or system requires from genesis. We talk more about this here: A Masterclass on Blockchain Governance Design.
Three Imperatives for Improving Enterprise Blockchain in 2020:
#1: Design the Platform for Adoption
Blockchain projects must maximize participation by delivering clear value to users and eliminating barriers and costs to adoption.
Answering the questions of who are the future users, what will their actions be, and what are their preferences, will allow enterprise blockchain projects to be designed in a way that their target participants will want to use them and engage with through value-generating behaviors. Understanding the user-base is the first step in developing necessary incentive mechanisms that will ultimately encourage targeted behaviors, which includes adopting the platform.
#2: Create an Incentive Compatible System
When designing incentives, a system must be free of any economic failure points including destructive items relating to moral hazard, free-riding, and adverse selection.
Creative a cohesive blockchain system requires understanding how each element relates to the next. Are all stakeholders’ incentives to contribute positively? Are any of the encouraged behaviors at odds with each other? It is imperative to the success of the system that all users, from the large contributors to any needed ‘end-of-tail’ users are properly motivated to conduct actions in a way that benefits the collective.
#3: Implement Flexible Governance Early
Developing governance of a blockchain system requires defining its goals and identifying its stakeholders and their needs.
Following this, projects can begin to construct the necessary elements of governance in a way that they match the expectations and goals of the stakeholders it looks to attract and retain. Identifying users, preferences, and actions will allow for the network to then look and decide the framework for deciding the unknown decisions for the future.
Looking Ahead to 2020
One of the most impressive trends of 2019 was the coming together of disciplines. In 2019, computer scientists, cryptographers, and economists worked side by side leveraging each other’s expertise. It was during the second annual research-focused Crypto Economics Security Conference that we launched a joint-service offering, Mainnet360, with leading blockchain technical security firm Trail of Bits. For more on this, watch the panel from San Francisco Blockchain Week: Economic & Security Audit Panel: Do’s and Don’ts.
While this initiative is just one of many, it is certainly true that the success of this technology is dependent on further interdisciplinary cooperation. From the technical team to the business team, enterprise tracks should have constant dialogue, knowledge of what the other is doing, and a channel for open communication when they see an opportunity to assist or learn. Moving into 2020, we can expect to see more of these trends. In doing so, we will move a step closer to mass-market adoption.
2020: Solving for ‘Hold-Up’
Addressing specific use-cases that solve real problems and provide value to users within the network will be key for enterprises seeking success in 2020. A helpful resource for identifying these opportunities is our research on the Hold-Up Problem.
You can learn more about that here: Can Blockchain Solve the Hold-Up Problem for Shared Databases?
You can read about an example of enterprises leveraging these concepts here: How JPMorgan, Johnson & Johnson And Ford Use Blockchain To Tap $3.1 Trillion In Value.
From a first-principles approach, enterprise divisions can leverage the concepts listed above and create consortium networks that will re-define their industry.
When identifying value, it is important to keep in mind that in order to be successful, value cannot just be re-distributed.
Instead, additional value must be unlocked for all associating parties. Without this, what is the incentive to join?