New research looks at the first generation of enterprise blockchain initiatives and finds success and lessons on which second-generation projects can build
In Brief: Important new research has taken a comprehensive view of the state of enterprise blockchain applications to assess their impact on operational problems and legacy technology platforms. The conclusions from the published work are that successful significant first-generation enterprise blockchain applications exist in various business functions; moreover, these pioneering efforts suggest that the oft predicted, but to date absent, business disruptions are increasingly possible.
Analysis: It’s been over a decade since the idea for blockchain was shared with the world by its anonymous creator. Since then, blockchain applications such as Bitcoin have experienced wild swings in value and public sentiment. On any given day, Bitcoin was hailed as the future of finance or a scam that would not be around a decade later. The latter opinion comes close to expressing how many corporate leaders initially reacted to blockchain technologies.
The skepticism from corporate leaders about blockchain was not hard to understand. This was a new, unregulated, and staggeringly complex concept to understand to anyone not familiar with the underlying principles and technologies. Add to those facets the cost, risk, and lack of blockchain skills within most big companies, and it’s easy to see why even experimental adoption has been slow. This attitude, however, is finally changing, and more and more companies are experimenting with blockchain applications and technology platforms. This increase in blockchain adoption means it’s a good time to pause and consider the state of blockchain initiatives in enterprise settings. Fortunately, a new paper from Mary Lacity and Remko Van Hoek (Sam M. Walton College of Business at the University of Arkansas) provides a solid analysis of where corporate blockchain efforts stand in 2021.
Before analyzing their findings, it’s worth taking a moment to recall why blockchains exists and how they work at the most basic level. As initially conceived, the aim of the blockchain was to solve something called the double-spending problem. This problem existed because, before blockchain, there was no way to limit the creation of digital currency or asset. In other words, say someone bought an ounce of gold with digital currency, nothing stopped the buyer from creating more digital currency and using it to buy more gold. Digital currency before blockchain lacked the simple scarcity that exists with paper money which can only be spent once. Blockchain solved digital assets’ double-spending problem by inventing digital scarcity (a concept most recently applied to a new digital asset, artwork, as has been widely reported).
Just how does blockchain create scarcity? The answer is a four-step process:
A deal is recorded. For example, let’s say Mr Pink is selling two of his coins to Mr Green for $100. The record lists the details, including a digital signature from each party.
The record is checked by the network. The computers in the network, called ‘nodes’, check the details of the trade to make sure it is valid.
The records that the network accepted are added to a block. Each block contains a unique code called a hash. It also contains the hash of the previous block in the chain.
The block is added to the blockchain. The hash codes connect the blocks together in a specific order.
Hash codes are what make blockchains special. This code is a unique series of letters and numbers created whenever a digital asset is created or involved in a transaction. Two key items to remember: no matter the size of the asset, the hash code is always the same. In other words, a tweet could have a hash code that looks like this:
Meanwhile, the entire novel Moby Dick would have a similar hash code:
Now, a change to any aspect of the original deal stored on the blockchain generates a new hash code — if a hacker changed one comma in Moby Dick, for example. Changing a single comma will create a new hash code and that would require the hacker to change every single other hash code in the chain that contains the Moby Dick digital asset. This is effectively impossible. Thus, the digital Moby Dick can stay in the blockchain, its owner knowing that there can be only one (now scarce) copy of this asset in the entire world. Even better (or worse, depending on your point of view), the entire system did not depend on one centralized computer to work; rather, it distributed all the blockchain work to thousands of machines called nodes, so that no one agent could control the entire chain.
This amazing ability to create digital scarcity and uniqueness has held great promise for many kinds of companies. The promise of value was so strong in certain critical applications that early adopters have used blockchain technologies to solve pressing operational challenges. In their paper, the researchers note that “pioneering enterprises reaping business benefits, more companies are ready to explore what blockchain can do for them.” Interestingly, the researchers note, “these first-generation applications are delivering business value, but they do not disrupt, transform, or obliterate existing structures; rather, they complement and grow ROI on existing technology like electronic data interchange, RFID, and the internet of things by removing friction shared by ecosystem partners.” These first-generation applications can best be understood, then, not as the tidal wave of disruption that many analysts predicted in the previous decade but as “a rising tide that lifts all ships.”
From the analysis presented, five key findings emerge about the state of enterprise blockchain applications in 2021.
Finding 1. Successful applications are business-led collaborations; blockchains are a backstory. First-generation blockchain applications reveal that the technology is the easier part of such initiatives and often just a backstory. The harder part is collaborating with partners to benefit from the technological capabilities.
In other words, companies started with a pre-existing operational challenge and then figured out how blockchain technology might solve that problem. For example, for an initiative called TradeLens, the global shipper Maersk wanted to improve how it tracks all of its shipping containers as they make their way around the world. As the company notes, “many of the processes for transporting and trading goods are costly, in part, due to manual and paper-based systems.” Replacing these “peer-to-peer and often unreliable information exchanges, the platform enables participants to digitally connect, share information and collaborate across the shipping supply chain ecosystem.” In essence, Maersk uses blockchain to record every movement of its containers across ships, ports, transportation companies, etc., so that it has a secure record of where everything is. Indeed, note the authors:
By November 2020, TradeLens had an ecosystem of more than 175 organizations (covering more than 600 ports and terminals) and had posted more than 1.6 billion transport events, 14 million documents, and 34 million containers to the blockchain. The platform’s business value includes reduced administrative costs, better tracking of containers, and faster processing of documents along the supply chain.
Finding 2. Enterprises are choosing private blockchains over public blockchains, but that may change. Just as there are public clouds and private clouds, so too are there public and private blockchains.
To date, note the researchers, most enterprise blockchain projects prefer to build their own chain and not use one available to the public. Concerns about security and data privacy are the main drivers of this trend. The applications of some of these private chains are quite interesting. For example, ANSAcheck (ANSA, Agenzia Nazionale Stampa Associata is Italy’s top newswire service) is a system that authenticates all news stories to ensure that they originated in ANSA and not from someone pretending to be them. As of October 2020, over 500,000 ANSA news stories had been posted on the ANSA blockchain, where their identity is verifiable and secure.
Finding 3. Trust is established with immutable proof that events occurred, not by sharing a lot of data. A well-designed blockchain backbone secures the proof that events happened in a certain sequence, without needing to share the detailed data. This engenders trust.
“In general, we don’t store much on-chain,” said Aaron Lieber, a TradeLens executive. TradeLens, like many platforms, stores only hashes of data on-chain, note the authors: “Even though enterprises cannot delete the hashes from the blockchain itself, they can retire the original data stored off-chain.” In other words, companies store only the minimum needed amount of the data necessary to make the blockchain work. Another example of this trend is MediLedger, a blockchain for tracking returned medicines that could be sold again in the future (about 2.5% of all medicines sold). The only data stored on the MediLedger chain are “the company identifier, the medicine item numbers, and the URL end point where supply chain partners request automatic verification for that product directly from the manufacturer.”
Finding 4. Enterprise applications do not eliminate trusted third parties; they often introduce new ones. Part of the early hype about blockchain was that trading partners would reap all of the benefits by no longer needing trusted third parties (TTPs). But a 2020 HFS Research survey with 318 respondents from Global 2000 companies found that only 6% of enterprise blockchain applications intend to remove intermediaries.
The researchers conclude that the predictions made that blockchain would wipe out intermediaries such as technology platforms and banks have proven wrong. Indeed, third-party providers such as IBM and Accenture play an increasingly important role in accelerating blockchain experimentation and adoption.
Finding 5. First-generation solutions will need to evolve. The early adopters in our study are joining consortia to define new standards, engaging with regulators, contributing to open-source code, and including current standards-making bodies in their design teams.
In all the successful blockchain projects analyzed by the authors, multiple parties had to collaborate in new ways; undoubtedly, these first-generation models are understandably not mature and will continue to evolve. Moreover, competing platforms will ultimately have to consolidate rather than offer conflicting paths to solving problems across geographical and industry boundaries.
Image Source: Authors
Blockchain, the researchers note, has long been touted as a disruptive technology that would obliterate old standards and platforms. The reality on the ground is that, for the most part, the first generation of successful blockchain efforts have complemented and benefited from existing enterprise technology platforms and the companies that build and maintain them. As the authors conclude:
The pattern that has begun to emerge is one of blockchain complementing existing technologies instead of replacing them. Blockchain benefits from existing technology inputs instead of making them obsolete. Just as enterprises moved from intranets to the internet when they gained confidence in the technology, the next generation of enterprise blockchain applications may be built on public platforms. Blockchain may also be more disruptive to traditional business models once education, standards, and regulations catch up with the technology.
Of course, given all the hype and noise over the past decade, skepticism about blockchain remains widespread. Indeed, a survey by Deloitte recently found that the number of respondents who consider blockchain to be “overhyped” actually rose significantly in 2020, hitting 54% versus 43% in 2019 and 39% in 2018. Despite executive uncertainty around blockchain, the reality is that the concept and technologies built from it do work; moreover, as more and more companies push blockchain applications into the real world, their disruptive effects will probably increase. As the authors note, blockchain “may also be more disruptive to traditional business models once education, standards, and regulations catch up with the technology.”
All in all, as 2021 swings into high gear, the takeaway for leaders from this new research is that blockchain solutions can be tested and put to work in an extensive set of business functions. Early adopters are having success, and more are sure to follow.
Lacity, M. & Van Hoek, R. (2021). What We’ve Learned So Far About Blockchain for Business. MIT Sloan Management Review, Vol. 62, No. 3, 48-54. https://sloanreview.mit.edu/article/what-weve-learned-so-far-about-blockchain-for-business/