“Blockchain matters because no business operates in isolation,” says Blockchain for Business, a recently published book by Jai Arun, Jerry Cuomo, and Nitin Gaur. “Multiple institutions can achieve more together than any single institution can alone. By implementing business processes that leverage the collective knowledge of the group, processes can be orders of magnitude more cost-efficient. New processes that were not possible before blockchain, can be created. This opens new opportunities and creates competitive advantage for many businesses.”
Since it fist came to light over a decade ago as the public, distributed ledger for the Bitcoin cryptocurrency, people have struggled to understand what blockchain is about and what it’s good for. This is not unusual for potentially transformative technologies in their early stages, as was the case with the Internet in the early-mid 1990s. The key question is whether blockchain has the potential to become a truly transformative technology over time. Most everyone agrees. According to Gartner, the business value-add of blockchain will be more than $176 billion by 2025, and will exceed $3.1 trillion by 2030.
There are two fairly distinct blockchains camps, - one primarily focused on blockchain as the underlying platform for cryptocurrencies, the other on the use of blockchain in the business world. The cryptocurrency camp, - best characterized by Bitcoin, - is mostly based on public permissionless blockchains, which operate anonymously and require some kind of proof-of-work or proof-of-stake systems. The second camp, - best characterized by Hyperledger, - is mostly interested in business applications, and is based on the use of private or public permissioned blockchains networks to handle interactions between institutions that are known each other.
- Accountability. “Network members are known and identified by cryptographic membership keys with assigned access permissions by business role.” Such accountability is necessary to comply with regulations like HIPAA and GDPR.
- Privacy. “Although members are known to the network, transactions are shared only with those members that need to know.”
- Scalability. “Supporting an immense volume of transactions is critical to enterprise scenarios.” Permissioned-based enterprise blockchains aren’t throttled by proof-of-work or proof-of-stake requirements.
- Security. “Enterprise blockchains are fault-tolerant. With fault-tolerant consensus algorithms, the network continues to operate even in the presence of bad actors or carelessness.”
- Motivational. “An enterprise blockchain benefits from a built-in incentive system to help accelerate the adoption curve,” such as loyalty-point-like tokens to encourage participation in the blockchain ecosystem.
In the 1990s, the Internet was supposed to usher a much more open, decentralized economy. Companies, from the largest to the smallest, could now transact with anyone around the world. Vertically integrated firms became virtual enterprises, increasingly relying on supply chain partners for many of the functions once done in-house. Experts speculated that large firms were no longer necessary and would in fact be at a disadvantage in the emerging digital economy because they couldn’t possible compete with agile, innovative startups.
But, as we well know, it hasn’t quite worked out as expected. Instead, we’ve seen the rise of the global superstar company and the unicorn startup. The Internet’s universal reach and connectivity has not led to a more decentralized, democratic economy. Instead, it’s led to the rise of platform economies, driven by powerful network effects. A small number of companies have become category kings dominating the rest of their competitors in their particular markets.
How did this come to happen, given the Internet’s open protocols and highly distributed architecture? Science writer Steven Johnson provided a very good explanation in a recent article.
Think of the Internet as being composed of two different layers stacked on top of each other, - InternetOne and InternetTwo. InternetOne was designed to be a relatively simple, highly flexible, general purpose data network that would support a wide variety of applications in the InternetTwo layer. InternetOne includes the various open protocols that’ve been defined by standard bodies and continue to be used today, - e.g., TCP/IP for managing the flow of bits; IMAP, POP and SMTP for email; and HTTP, HTML and URLs for the Web.
Being general purpose was a fundamental design choice, which has enabled the Internet to keep growing and adapting to widely different applications. But, to keep InternetOne as simple and flexible as possible, just about everything else, - including identity and security management, - became the responsibility of the applications in InternetTwo. And, unlike InternetOne, there are few universal open-standards in InternetTwo. It was left to private sector companies to define such protocols in each of their applications, with the result that there are no general standards or common governance for managing identity and security, - arguably the biggest challenge still facing the Internet.
The lack of identity and security standards is a major reason for the rise of superstar companies which established defacto standards within their proprietary platforms based on their huge troves of data. Consequently, while the open, decentralized Internet is alive and well in the InternetOne layer, the InternetTwo layer has become highly centralized, dominated by a few huge companies.
Blockchain technologies have the potential to address these serious Internet problems by enabling the exchange of the critical data required to validate identities in a secure, decentralized manner without the need for a central platform or other intermediaries. Over time, blockchain-based applications could be used to coordinate the self-organizing activities of large numbers of individuals and institutions in a secure and decentralized manner, as was the case with the Internet’s early objectives.
Blockchain for Business argues that this is what makes blockchain one of the most disruptive technologies of the 21st century, - a major next step in the evolution of the Internet. “The transformational shift that blockchain delivers is the trust among distrusted parties. This shift disrupts the way that you do business. It brings many new opportunities and a shared or peer-to-peer economy for every industry and organization, including intermediaries to reimagine and transform their business processes and business models.” Blockchain technologies drive such transformational opportunities in three key ways:
Distributed organizational structures. “The distributed nature of blockchain technology with consensus and smart contracts delivers a self-governing business network with a greater autonomy that flattens traditional enterprise structures into a distributed and shared structure. The business transactions are managed in a distributed and shared ledger with transparency and visibility across the network without any complex and hierarchical nature.”
Trusted business models. Traditional, process-heavy business models often require intermediaries and/or large bureaucracies to manage the interactions among institutions due to limited trust and transparency, leading to inefficiencies, high costs and sluggishness throughout the economy. “Blockchain presents many opportunities… to disrupt traditional business models by using peer-to-peer exchange with trust, digital and automated execution of business contracts, and agreements with smart contracts. The intermediation between third parties is handled by distributed ledger and transparency, and transactions integrity with security and cryptography.”
Decentralized ecosystems. With blockchain, the ecosystem is the business. Value is co-created among cooperating organizations and systems. “Peer-to-peer models are driving the new ecosystem of players and disengaging intermediaries.”
In the end, “It is not a matter of mastering the blockchain technology; instead, it is rethinking your current market role, value streams, and existing business ecosystems and finding opportunities to transform.”
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