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Distributed ledger technologies — collectively known as blockchain — have burst onto the business scene, accompanied by a significant amount of hype.1 They are widely expected to disrupt existing industries and lead to the creation of new types of companies.
Some of the excitement may indeed be warranted, but only if organizations focus on how these technologies can be used to support their strategy. Without that lens, companies risk making large investments in initiatives that don’t create meaningful value.
However, with careful planning, businesses can use blockchain to gain an edge over rivals in a number of ways. It can provide a foundation for powerful applications that will streamline core operations. Distributed ledger technologies can lower transaction costs and make intellectual property ownership and payments more transparent, seamless, and automated. But companies should resist jumping on the bandwagon until they first understand what specific problems they can solve with blockchain — and for whom. How will it help them reach new customers? How can it improve efficiency or transparency in their supply chains? And most important, what will blockchain enable them to do that competitors and new entrants can’t do? Answering these sorts of practical, targeted questions will allow businesses to cut through the hype and create a blockchain strategy that makes sense for them.
To begin, it’s critical to understand the basic uses and functionalities of blockchains, which tend to get lost in the buzz. So we will provide a quick primer on digital ledgers before discussing how companies should build powerful problem-solving applications that are uniquely configured to their own strategies.
The Power of a Ledger
The first known ledgers date back some 5,000 to 10,000 years to Mesopotamia, where simple clay tokens and stone tablets were used as markers of transactions.2 They were a centralized form of record keeping that helped people keep track of things like the price of barley, who bought the barley from whom, or who owned or purchased a piece of land.3
Over time, such ledgers formed the basis of wide-scale economic development and activity. They allowed people to gauge who could be trusted, leading to the emergence of reputation, credit, and long-distance trade. Moreover, they helped resolve disputes about goods sold and money owed.
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2. S. Basu, J. Dickhaut, G. Hecht, K. Towry, and G. Waymire, “Recordkeeping Alters Economic History by Promoting Reciprocity,” Proceedings of the National Academy of Sciences of the United States of America 106, no. 4 (2009): 1009-1014; and S. Basu and G.B. Waymire, “Recordkeeping and Human Evolution,” Accounting Horizons 20, no. 3 (2006): 201-229.
3. D. Snell, “Ledgers and Prices: Early Mesopotamian Merchant Accounts” (New Haven, Connecticut: Yale University Press, 1982).
4. J.J. Roberts, “Microsoft and EY Launch Blockchain Tool for Copyright,” Fortune, June 20, 2018.
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10. E. Brynjolfsson, “The Productivity Paradox of Information Technology,” Communications of the ACM 36, no. 12 (December 1993): 66-77; and E. Brynjolfsson, D. Rock, and C. Syverson, “Artificial Intelligence and the Modern Productivity Paradox,” working paper no. 24001, National Bureau of Economic Research, Cambridge, Massachusetts, November 2017.
11. T. Felin and T. Zenger, “What Sets Breakthrough Strategies Apart,” MIT Sloan Management Review 59, no. 2 (winter 2018): 86-88.
12. D. Harhoff and K.R. Lakhani, eds., “Revolutionizing Innovation: Users, Communities and Open Innovation” (Cambridge, Massachusetts: MIT Press, 2016); and T. Felin and T. Zenger, “Closed or Open Innovation?: Problem Solving and the Governance Choice,” Research Policy 43, no. 5 (June 2014): 914-925.