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B as Blockchain for business

Anna Flach 22 January 2020

Over the last few years, blockchain has been spreading through organisations within countless industries. From technology firms to financial markets and logistics – today only a few doubt its disruptive potential. Blockchain has also proven its importance by rising investments through venture capital funding, which has grown from $1 billion in 2017 to $3 billion in 2018.

However, through the turmoil of cryptocurrencies, the complexity of the technology and the wide variety of sometimes unfounded ideas, it is hard to see the real value of blockchain. The process is neither new nor surprising. Even during the dotcom boom, it took a while for companies to unveil the real value of the internet.

Here you can find a brief overview of the possible methods of implementation and the paths to value creation with blockchain technology.

Key elements of blockchain technology

Value creation in blockchain happens by using different elements of the technology individually or in combination with one another. These elements can be summarised in five points:

  1. Tamper-evident database: a blockchain database cannot be edited without a trace
  2. Cryptographic proof: blockchain uses advanced cryptographic techniques which prove identity and transaction history and serve as digital signatures
  3. Peer-to-peer connections: blockchain enables parties to interact directly without the necessity of an intermediary
  4. Shared ledger: blockchain is a shared database between various parties
  5. Smart contracts: blockchain provides the possibility to use smart contracts to automate processes

Implementation environment

A key differentiator in the potential use case of blockchain is the method of implementation. Blockchain can provide value in a linear setting, which helps to align processes through a chain of actions. This can be a production environment, supply chains or data recording, leveraging the tamper-evident database and cryptographic proof functions. Linear implementation describes use cases as static registries, such as a land registry, or a food supply chain where the end consumer is provided with proof of origin.

The second implementation environment is within a network of participants. Within the network, the last three key elements are more significant: peer-to-peer connections, shared ledgers and smart contracts. This means that within a network blockchain can help to establish more efficient communication and a single source of truth between the participants. When implemented within a network, blockchain can help facilitate faster transactions on the web of financial markets, or help to set up automated deals between insurance parties.

Value creation

Value creation in blockchain can be divided into three main paths: operational efficiency, risk mitigation and new business models. In all of these categories, blockchain doesn’t only solve existing pain points but can create additional unprecedented gains.

Operational efficiency

The first and perhaps most commonly cited benefit of blockchain is that the technology raises operational efficiency in terms of cost, speed and simplicity.

Blockchain can establish a single source of truth between either linear or network participants, which can reduce the resources spent on synchronising ledgers as well as administrational burden. It can also help to lower the necessity or involvement of intermediaries, hence allowing transactions to cut out an extra step of cost and complexity. In addition, blockchain can enforce business logic in code using smart contracts. They make transactions faster, easier and automated, allowing us to free up time for more complex work.

For example, according to the Economist, Santander Bank believes that financial institutions could generate $20 billion in savings by applying blockchain to streamline and automate many back office activities.

Risk mitigation and increased trust

Blockchain technology allows us to form a secure cryptographic identity through public-key infrastructure and a tamper-evident database. These elements open the door to a more secure way to manage identities online, and can help to aggregate sensitive data into a single database. This could be revolutionary for static registries such as land registries or personal information like medical data.
Digital identity improvements through blockchain can also help financial institutions meet the ever-changing KYC (know your client) and CDD (customer due diligence) requirements while simultaneously reducing the costs associated with implementing a robust KYC programme.

The technology can help us create a new foundation of trust through transparency. Participants can easily verify information about others through the shared data and lower levels of risk.

New business models

Operational efficiency and increased trust can be achieved through blockchain when applied to current business models. However, as technology is rich in possibilities and at the beginning of its evolution, we can only hint at the future implementation methods.

Blockchain technology can restructure current transaction models in many industries. Let’s take for example the energy industry. At this moment it is a linear model, where the consumer receives energy from one provider or from their own resources, such as solar panels. They are not connected to any other external party for that particular resource, and any excess energy goes effectively to waste. If we were to connect more participants on a decentralised platform, then the unused energy could be provided to another consumer in need. Blockchain technology allows you to create microgrids and helps you track through a shared ledger the flow of energy and transactions between participants. This can create more efficiency within the network and lower the transfer costs – as the energy would be sourced locally instead of a central power plant.

The energy industry example constitutes only one of the many different business models which could be created via blockchain. There are endless examples from as diverse fields as arts, asset management or advertising.

Key takeaway

Blockchain benefits can be reached either in a linear fashion through a single organisation, or by facilitating transactions within a network. The technology can help to create value by increasing operational efficiencies, mitigating risks or by allowing to create better business models. Blockchain for business as transformative for transactions as the internet was for communication.

Resources:

https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/blockchain-beyond-the-hype-what-is-the-strategic-business-value

https://www.bcg.com/en-gb/publications/2019/capturing-blockchain-value.aspx

https://www.bcg.com/en-gb/capabilities/technology-digital/strategic-opportunities-blockchain/what-is-blockchain.aspx

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