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Blockchain is a data storage technology with implications for business that extend well beyond its most popular application to date — the virtual currency, Bitcoin. To be sure, the financial industry is taking notice of how it might use blockchain. Even the U.S. Federal Reserve is optimistic, and a consortium of 42 top banks recently demonstrated a proof of concept, with Barclays, BMO Financial Group, Credit Suisse, Commonwealth Bank of Australia, HSBC, Natixis, Royal Bank of Scotland, TD Bank, UBS, UniCredit, and Wells Fargo trading mock shares and money. These are staid financial institutions, not breathless startups.
But what is it? In short, blockchain is an approach to storing data that allows a ledger of transactions that …
- can be visible to anyone, allowing transparency into the complete history of the ledger;
- can be distributed across many devices, supporting many independent copies and sources of data;
- can be verified as consistent, giving confidence to users that the embedded data is correct;
- can work with intermittent connectivity, supporting data generation and replication without robust networking requirements;
- is resistant to malicious actors, preparing for widespread use where all users cannot be trusted.
BitCoin, for example, provides a distributed database of coin ownership that is used to exchange coins between parties without requiring mutual trust. While the Bitcoin technology works as promised, virtual currency users have brought negative publicity — everything from valuation fluctuation and exchange collapses to use in ransomware, outright theft, and clandestine activity on the online drug-dealing site, Silk Road.
The less-than-saintly uses of new technologies seem to gather early attention — for example, early adoption of videotape is often associated with adult content and product piracy, illegal weapon manufacture with 3D printing, drug delivery with drones, and so on. Nefarious users can be early adopters, too — and may be quicker to adopt a promising technology that lacks institutional, organizational, or regulatory constraints.
However, ignoring blockchain because of some dastardly uses would be throwing the baby out with the bathwater. Instead, managers need to build their organization’s “absorptive capacity” around this topic for at least three reasons: (1) the potential effects on organizational value chains, (2) communication within and between organizations, and (3) benefits from cooperation.
The Effect on Value Chains: Disintermediation
The last 20 years haven’t been kind to intermediaries. One huge effect of the widespread adoption of the Internet is the ability for producers to directly link to consumers, bypassing wholesalers and retailers. The sharing economy is the most recent incarnation as emerging platforms match those who have with those who need.
Blockchain is another enabler of disintermediation. Certainly the financial industry is a clear example where the registry of who owns which currency has the potential to be flattened. It is no surprise to hear that large financial institutions are experimenting with blockchain; credit default swaps are a recent illustration. But currently many other registries still exist — real estate ownership, for example. Why do we need institutions to enable trust in ledgers of information if an alternative method of enabling trust exists? If your organization creates value by legitimizing trust in a registry or exchange, blockchain may herald changes to your business model.
The Effects of Communication: Automatic Transactions
Considerable time in organizations is spent verifying, monitoring, and enforcing agreements. Did the buyer pay on time? Did the seller ship on time? Monitoring this is a loss of societal welfare — a form of overhead that each side must pay, but one that often adds little value to either side. Both sides would prefer not to incur these costs, but both must in order to protect themselves.
Yet many straightforward contracts could be automated with reduced transaction costs for either party. Smart contracts embed contracts in protocols, such as blockchain, that can make contract execution more efficient and automated. This will be increasingly important as we connect small devices that may could be tied to contracts via the Internet of Things. These computer-mediated transactions can intertwine commerce and data collection. Furthermore, as associated costs for contracting and accounting drop, ever-smaller micro-transactions become economically feasible. Such widespread adoption of blockchain rattles the core of accounting itself — Pac-man eats Pacioli.
The Effects of Cooperation: Shared Development
For the Internet of Things to avoid numerous pitfalls, organizations must get much savvier about the necessary changes. One helpful strategy would be to work together so that everyone doesn’t have to make the same mistakes and reinvent the wheel. For example, early programmers worked on a data storage protocol called ACID (atomicity, consistency, isolation, durability), but realized that sharing common software libraries helped avoid reinvention.
Blockchain has a similar role. It is unlikely that many organizations will have distributed data storage as a core competency. But IoT devices require distributed data storage. By working with shared protocols like blockchain, organizations can focus on what differentiates their value. This shared infrastructure can spur IoT deployment by decreasing development time and increasing the return on investment for candidate projects.
Blockchain itself is far from perfect, and most organizations are still learning, not doing. There will be mistaken applications and visible failures. But we’ve had messes before with the current technologies we use; blockchain offers a new approach toward data storage that builds off our prior messes and cumulative learning about data storage problems and solutions. From this perspective, the “chain” of blockchain conjures the wrong connotation. The chain of blockchain can liberate rather than shackle by enabling trust, freeing companies to allocate resources towards value-creating activities rather than infrastructure.