![]()
CHAPTER 1
THE REAL BUSINESS OF BLOCKCHAIN
On a recent flight to Dubai, David sat next to the CEO and chairman of a European company investing in blockchain. Over the eight hours, the CEO talked about transforming his familyâs business from its twentieth-century origins as an industrial extractive company into a real estate developer, and then diversifying into cloud computing and now blockchain. This classic tale of creative destruction executed from inside an organization would seem, on the surface, the least likely move for a company like his, given its old money and old-world history.
Thatâs how it happens with blockchain. It has captured the business imagination. Many see it as the solution for bringing trust and transparency to digital environments. In doing so, it could expand trade, enable new markets, and provide better tools to manage expensive, opaque processes that cost firms millions of dollars. This promise has made blockchain one of the most popular subjects among clients at Gartner, the global research and advisory firm where both of us work.
Companies in industries as diverse as finance, sports, health care, retail, oil and gas, and pharma are engaging in a wave of blockchain experiments. Theyâre hoping to solve intractable issues such as counterfeiting and fraud, inefficiencies caused by opaque or manual processes, and perennial challenges with data quality and data management. Startups are also developing solutions, for example, to innovate movie financing, social media engagement, hospitality, and the gaming industry.
Here are just a few organizations that we spoke with while researching this book:
- The Australian Stock Exchange (ASX) and the Depository Trust and Clearing Corporation (DTCC) are developing blockchain platforms to modernize the mechanisms used for asset clearing and settlement.
- Taipei Medical University Hospital is developing a blockchain solution to facilitate cross-organizational access to patient records, with the patientâs consent.
- The Union of European Football Associations (UEFA), organizer of the Champions League and Euro football tournaments, is working with IT solution provider ELCA to develop a blockchain solution to prevent fraud and price gougingâmajor problems with tickets sold on the secondary marketâand to maintain security oversight at tournament venues.
- Volkswagen and Renault are separately using blockchain to create an immutable âpassportâ that captures vehicle history and maintenance records to prevent odometer tampering and other costly forms of fraud.
- The city of Austin, Texas, is creating an ID system to help homeless people access medical care and other services.
Expectations for blockchain are well founded. With our colleagues at Gartner, we have estimated that blockchain could generate as much as $3.1 trillion in new business value by 2030, half of it by 2025 with applications designed for operational improvement.1
Yet these returns will not come for free. One of our aims with this book is to substantiate the claims made for blockchain, clarify what is real and what isnât, and help you as a business leader understand what you will have to do to secure your share of the value. With that in mind, we want to emphasize that the way enterprises are talking about and using blockchain today is just an initial step. Beyond operational improvements and increased efficiency, fully mature blockchain solutions will allow you to reengineer business relationships, monetize illiquid assets, and redistribute existing data and value flows in ways that could reinvent how your business engages in a digital world. That is the real business of blockchain.
To describe how you can begin to unlock your share of that value, we will first clarify what blockchain is and what it enables you to do that canât be done with other technologies.
THE FIVE CORE ELEMENTS OF BLOCKCHAIN
Formally, blockchain is a digital mechanism to create a distributed digital ledger on which two or more participants in a peer-to-peer network can exchange information and assets directly without the need for a trusted intermediary. The blockchain authenticates the participants and validates that they own the assets they want to exchange and that the transaction can take place. The blockchain records the information pertaining to the transaction on a digital ledger, a copy of which is independently held and updated by each participant in the network. Records are unchangeable, time-stamped, encrypted, and linked to each other in blocks; each block is a cluster of about two thousand transaction records grouped together.2 The ledger grows as participants transact.3
But informally, what does that definition mean? It means you can theoretically do business with an unknown partner located anywhere on the planet and trade any asset at any transaction size and not need a lawyer, a bank, an insurance company, or any other intermediary making sure both of you follow through on what youâve promised to do. Such a solution vastly expands the range of assets that a business could trade. The arrangement also greatly increases who or what a business could directly trade with, without needing a third party (which would take a piece of the value).
Blockchain combines existing technologies and techniques into a novel architecture composed of five elements (figure 1-1):4
- Distribution. Blockchain participants are located at a physical remove from each other and are connected on a network. Each participant operating a full node maintains a complete copy of the ledger, which updates with new transactions as they occur. Nodes are the machines owned or used by participants and equipped to run the consensus algorithm described below.5 Any participant can review any part of the ledger but cannot change it except under prescribed circumstances.
- Encryption. Blockchain uses technologies such as public and private keys to record the data in the blocks securely and semi-anonymously (participants have pseudonyms). The participants can control their personal identity and other information and share only what they need to in a transaction.6
- Immutability. Completed transactions are cryptographically signed, time-stamped, and sequentially added to the ledger. Records cannot be corrupted or otherwise changed unless the participants agree on the need to do so. Such an agreement is known as a fork.7
- Tokenization. Transactions and other interactions on a blockchain involve the secure exchange of value. The value comes in the form of tokens.8 Digital markets can function more effectively with tokens and need to create them (tokenization) for various reasons. Tokens might function as digital representations of physical assets, as a reward mechanism to incentivize network participants, or to enable the creation and exchange of new forms of value. They also allow private and corporate participants to control their data.
- Decentralization. Both network information and the rules for how the network operates are maintained by multiple computers, or nodes, on the distributed network. In practice, decentralization means that no single entity controls all the computers or the information or dictates the rules. Every node maintains an identical encrypted copy of the network record. A consensus mechanism operated by each full node verifies and approves transactions.a This decentralized, consensus-driven structure removes the need for governance by a central authority and acts as a fail-safe against fraud and bad transactions.
FIGURE 1-1
The five elements of blockchain
Together, these five core elements of blockchain allow two or more participants who donât know each other to safely interact in a digital environment. Our insistence on all five elements is not semantics. When a blockchain is missing one or more of these elements, its value is limited or even negated.
There are, however, opposing views on this subject. New technology often goes through a period when opportunistic actors try to define the market in ambiguous or self-serving ways. The use of the word âdatabaseâ to describe blockchain is an example of this. Blockchain isnât a database. Although vendors sometimes falsely describe it as one, the mechanism has several key differences. For instance, unlike databases, blockchain is not a general store for information. Moreover, blockchain is immutable; it is not read, written, deleted, and changed the way that databases are. Most importantly, while a database can be distributed to various parties, only one central administrator controls it. In blockchain, administration is through consensus.9 Central control is contradictory to the very idea of blockchain.
We see misleading language in other contexts as well. There is rampant âblockchain washingâ by vendors trying to sell packages or services that use some blockchain-enabling technologies and only a subset of blockchainâs design elements. Likewise, some tech-savvy companies are implementing solutions they are calling âblockchain,â and then requiring supply-chain partners to integrate with them as a way to embed these partners deeper into their ecosystem.
Then there is the simple reality that blockchain is immature and organizations donât know how to use or extract value from it yet. Many are therefore experimenting with only the elements they understand and have the skills to manage. Consequently, most of the so-called blockchain solutions currently in development, a few of which we listed at the start of this chapter, use only some of the five elements of blockchain. The companies may not have even needed blockchain to achieve the same ends. According to our research, traditional data architecture could have done as well as, or better than, blockchain in 85 percent of these projects.
HOW BLOCKCHAIN UNLOCKS VALUE FOR YOUR BUSINESS
We cannot overstate the amount of new commercial activity that blockchain could enable. To get a sense of the opportunity, consider the amount of data produced today by mobile devices, GPS, internet of things (IoT) sensors placed in physical environments, and dozens of other enabling devices that are rendering both digital and physical assets visible to networked environments. Almost unfathomable, this network of devices captures more than 2.5 quintillion bytes of data created daily.10 Leaders like you want to monetize these new data assets for your company and trade them with willing buyers.
But the centralized infrastructure you rely on to execute commercial transactions and manage riskâpayments systems, insurance, delivery and logistics services, and legal contractsâwas not designed to handle the kinds of machine-to-machine transactions possible today with digital or digitalized assets. Digital transactions donât have a minimum size the way transactions do in the analog world. Units of data, cryptocurrency, reward points, and pieces of an asset (as opposed to the whole) are just a few new forms of value that digitalization makes tradable in single units. Individually, the units could be worth less than $0.01, but they can be traded by the millions or trillions. The burgeoning trade in these digital assets is big business, exploding as we write this book. Amazon has a patent for a streaming data marketplace.11 Digital industries like gaming are embracing microtransactions for in-game purchases. And new markets are forming daily to trade data, single watts of energy, carbon credits, and other digitally represented assets. The cryptocurrency and initial coin offerings (ICO) craze that took hold in 2017âfollowed by a deep crash and movements toward regulationâhas not curtailed the enthusiasm to experiment with finance. This enthusiasm points to the mainstreaming of token-driven business models that are enabled by a blockchain to finance and capture digital opportunities.
Traditional centralized mechanisms for establishing trust, identity, and payment were not built to autonomously handle these microtransactions by the trillions in a distributed machine-centric environmentâand they canât handle them, certainly not securely and efficiently. Businesses need a different way to deal with new digital assets and interactions without involving an intermediary that can collect data on every party in the transaction and take a piece of the value. You need blockchain.
Blockchain can also redirect existing value flows. It does this by reducing control over four business currencies by central market powersâincluding large multinational corporations, digital platforms, and large intermediaries. The business currencies are: data, access, technology, and contracts. We revisit them at various points throughout this book. Suffice it to say for now that data is the anchor currency because of how customers leave behind a data trail, like Hansel and his breadcrumbs. Powerful market intermediaries such as large retailers, financial services firms, government agencies, and digital platforms can pick up this data essentially for free and analyze it to improve user experiences and to drive product development. Organizations that can capture plenty of data at very low cost and analyze it thus have an advantage over others in the value chain.
Blockchain starts to break that advantage by redacting the data trail. Instead of leaving data behind as you search and interact with a person or an organization, the data related to both you and the other parties on a blockchain can, under specific design conditions, be kept under participant control and shared as needed for a transaction. This shift in control prevents a central actor from capturing an outsize share of value and ushering it off-chain or using undue influence to nudge customer behaviors in particular directions. In this way, blockchain also reopens existing markets to new competition.
GOING BEYOND THE HYPE
The potential to create new value and unlock existing value flows makes blockchain one of the most revolutionary technologies available today. But in its current state, blockchain is, from an enterprise perspective, still young and evolving. It has yet to prove itself in a hardened business context, and some of its elementsâdecentralization and tokenization, in particularâare ra...
