While many companies are anxious to implement blockchain, few actually understand the true benefits of blockchain, where it should be used, or what type of blockchain implementation to adopt.
The recent hype around blockchain is in part due to its link to cryptocurrencies and the increased interest in them. This has resulted in blockchain investments hitting an all-time high of more than $12 billion in 2018. Use cases for blockchain have since been sprouting like weeds – so much so that blockchain made its first appearance on Lux’s 19 for 2019 report, catapulted in part by all of this investment.
More than a digital innovation, blockchain is a microeconomic tool that allows an organization to establish trust around information, physical objects, people, and money. Trust forms the cornerstone of every business transaction and blockchain could offer a cost-efficient way of establishing and maintaining trust in the marketplace. Unfortunately, as we noted in our recent report, few organizations understand the fundamental purpose of blockchain.
Consequently, today, there is a lot of hype around blockchain and we anticipate that more than 50 percent of the use cases being tackled today are destined to fail. Examples include Binkabi, which is using blockchain to enable international produce trades, and the Chilean National Energy Commission (CNE), which is using blockchain to store energy data to prevent tampering. One of the reasons why many of these use cases will fail is because the information on blockchain is only as accurate as the underlying raw data itself and unfortunately, few blockchain implementations are focusing on collecting this raw data in an automated tamper-proof manner. This is where companies like DUST Identity, which offers a novel low-cost material technology that can uniquely authenticate every individual product in the supply chain, could make a difference.
In the recent Lux report “Trust and Efficiency: Finding the Right Applications for Blockchain," we developed a framework that clients can use to answer questions like when and where they should implement blockchain and what architectural parameters they should consider while evaluating their blockchain solutions.
To determine if it really needs blockchain, an organization should:
- Determine the level of trust in its network of stakeholders
- Carefully measure the cost of loss of trust
- See if traditional approaches to establishing trust in the network, such as legal contracts and middlemen, are falling short
- Perform a cost-benefit analysis by evaluating the cost of implementing and operating blockchain and comparing it against the cost of loss of trust
While there are nearly a dozen different operating parameters associated with blockchain implementation, an organization needs to worry only about four major architectural parameters, which determine the other operating parameters; these are blockchain type (permissioned vs. permissionless), the consensus algorithm, ability to execute smart contracts, and existence of underlying tokens and monetary policy.
While blockchain is a very innovative technology, organizations should carefully evaluate their use case using the framework provided here before jumping headlong into implementing it.