What We’ve Learned So Far About Blockchain for Business

The biggest challenge to companies creating blockchain apps isn’t the technology — it’s successfully collaborating with ecosystem partners.

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It’s understandable why many businesses have been slow to invest in blockchain. For the past few years, the C-suite has been showered with suggestions about navigating the next wave of blockchain innovation, identifying potential use cases across industries, and preparing for a blockchain future.1 On the one hand, executives have been warned about blockchain’s potential to disrupt business models, disintermediate trusted third parties, and “change the very nature of economic, social, and political systems.”2 On the other hand, leaders have been cautioned about blockchain’s hype and hidden vulnerabilities.3 But doubts about blockchain are fading, according to a Deloitte survey, which found that more than half of senior executives place blockchain among their top five strategic priorities.4

Blockchains are shared software applications that validate and create tamper-resistant records of transactions among participants in the network. At their core, blockchain applications enable programmable rules for value exchange and shared record-keeping. Everyone in the network agrees on what has happened because they’re all working from the same record. Bitcoin, released as the first live blockchain application in 2009, was a powerful proof of concept, but its use as a cryptocurrency initially deterred many enterprises from adopting it. Executives did not see the relevance to their businesses: They feared that cryptocurrencies’ anonymity would limit compliance with anti-money-laundering and know-your-customer laws, or they believed that the technology was too immature and unstable to meet enterprise requirements. Now, with pioneering enterprises reaping business benefits, more companies are ready to explore what blockchain can do for them.

We’ve studied over a dozen live solutions in use across a range of industries and a variety of companies, including solutions to track shipping containers, trace food from farm to fork, authenticate pharmaceuticals, and compensate content creators. (See “The Research.”) 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. They can be characterized not as a tidal wave of disruption but as a rising tide that lifts all ships.

Overall, we identified five insights for executives to consider as they determine where blockchain-based solutions can add value for their own organizations and how to plan for implementation.

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. The solutions in our study were business-led projects aiming to solve ecosystem-level challenges that turned out to be well suited for a blockchain backbone. They were “blockchain enabled” rather than “blockchain applications,” and they are successful because ecosystem partners overcame the difficult challenges of working together.

Two of the most talked about blockchain-enabled solutions in production today — TradeLens, started by Maersk, and the IBM Food Trust, started at Walmart — are good examples. Neither of them started as blockchain projects.

Maersk, a Denmark-based global shipping company, wanted a better and cheaper way to track shipping containers. In 2013, the process still relied on paper documents from many supply chain partners and regulators. The company launched two separate initiatives: one to reduce the administrative costs of handling shipping containers, and another to digitize shipping documents for paperless trade. In 2016, the projects were joined to form the Global Trade Digitization project. Maersk’s technology partner, IBM, introduced blockchain as an enabling technology later that year.5 The project evolved into TradeLens.

Next, Maersk realized that in order to get widespread adoption from key network participants such as ports, terminals, and authorities, competitors needed to be on the platform as well. This was the most difficult challenge: Companies like CMA CGM, Mediterranean Shipping Co., Hapag-Lloyd, and Ocean Network Express were initially wary of joining a platform created by a competitor. To ease their concerns, Maersk created a customer advisory board that included competitors for more inclusive and transparent governance. 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.

At Walmart, meanwhile, Frank Yiannas, then the vice president of food safety, was looking for a better way to trace fresh produce through the retailer’s supply chain. At the time, it could take weeks to trace an outbreak of E. coli or salmonella back to its source.

IBM, which was also Walmart’s technology provider, again introduced blockchain.6 The initial pilots tracing mangos and pork in Walmart’s supply chain took very little time to develop. But real traceability would require participation by everyone in the ecosystem. Many retailers source from the same suppliers as Walmart, so having competitors on the platform would be advantageous for network effects. Aware that other retailers would be reticent to join a platform operated by Walmart, the company decided that IBM should launch and operate the ecosystem solution, known as the IBM Food Trust. The new organization created an advisory council comprising Walmart, Dole, Nestlé, Kroger, Carrefour, Danone, Driscoll’s, Golden State Foods, and GS1 (a not-for-profit organization that develops and maintains business communication standards) to further help competitors collaborate. Early IBM Food Trust adopters then had to persuade their trading partners to join in order to achieve end-to-end traceability. Smaller partners, often with less technical maturity and a smaller investment capability, were provided with assistance. For example, Walmart’s and IBM’s support and implementation teams worked for several months to onboard more than 100 of Walmart’s suppliers of leafy greens.7 By the end of 2020, the IBM Food Trust had more than 280 members, 40 million transactions, and 25,000 SKUs.

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. For now, many enterprises in our study have chosen private blockchains to ensure confidentiality; only parties with permission can view transactions. Not even IBM, which is the IT operator for TradeLens, the IBM Food Trust, and the We.Trade trade finance platform, can interpret the data on those blockchains unless authorized by the data owners.

KoreConX is another example of a blockchain-enabled solution built on a private network. It provides private companies with much-needed access to global capital markets. While public companies have easy access to global investors who can use their cellphones to issue trades in seconds, private companies rely on local dealers and brokers, and it typically takes weeks to find a counterparty, negotiate an agreement, and gain approvals from their boards. KoreConX solves this problem by providing small and medium-sized enterprises with a global platform to manage fundraising and compliance reporting.

KoreConX chose a private blockchain for the platform because “we operate in a highly regulated market,” said Kiran Garimella, its chief scientist and chief technology officer. “We could not imagine our small business owners posting transactions on public networks or learning to manage their own digital wallets.” By the end of 2020, KoreConX’s blockchain (KoreChain) was deployed in 23 countries on platforms from five different cloud service providers (IBM, Amazon Web Services, Microsoft, Google, and DigitalOcean). It had onboarded 105,000 private companies, along with 2.8 billion shares, 68 million options, and 45 million warrants, onto the platform.

Enterprises also have chosen private networks because, in addition to addressing confidentiality concerns, they can process more transactions per second than public networks. Lack of scalability is a serious limitation for public blockchain networks, which typically process under 20 transactions per second while they wait for thousands of nodes in the network to reach consensus on the validity of recent transactions. In contrast, private blockchains can process hundreds or even thousands of transactions per second. KoreChain has the capacity to process about 318 transactions per second, or 10 billion transactions per year.

But business leaders should not permanently dismiss public blockchains. Many projects designed to increase confidentiality and scalability are underway, and there is a growing acceptance that many enterprises will use public networks in the future. Public blockchains are already orders of magnitude larger in terms of number of users compared with private blockchains, and they are managed by open-source communities and nonprofits, so no single entity is in control. Professional services firm Ernst & Young (EY) is taking major steps to help enterprises use public blockchains by developing, in essence, a “virtual private blockchain” — similar to a virtual private network that is connected to the public internet, but where data remains private from anyone not authorized to see the transaction.

EY developed WineChain to authenticate wines and restore trust to a marketplace plagued by fakes — counterfeit wines are a multibillion-dollar business.8 Each wine bottle gets a QR code that is tokenized and posted to Ethereum, a public, open-source blockchain platform. Customers can scan the code with their smartphones and determine whether the wine is authentic. Wine producers, brokers, importers, wholesalers, distributors, and retailers rely on Quorum, a private network version of Ethereum, to change ownership of and track the bottles as they move through the supply chain.9 EY chose Quorum in anticipation of a market pivot from private to public networks; building on Quorum with public blockchains in mind minimizes the recoding required to switch to Ethereum in the future.

In the media industry, ANSAcheck, developed by EY and Agenzia Nazionale Stampa Associata (ANSA, Italy’s top newswire service), authenticates the source, updates, and reposts legitimate news stories. Rather than spotting fake news after the fact, this solution authenticates the source of a news story and guarantees that a story came from ANSA. Part of the application runs on Ethereum. As of October 2020, over 500,000 ANSA news stories had been posted on the public blockchain.

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.

There is not much data stored on these first-generation solutions. The originating data comes from internal systems of record that interact with the blockchain-enabled application. The shared ledger itself primarily locks in cryptographic proof of events. One can think of the blockchain components as shadow systems that provide a lightweight pipeline that connects to each enterprise’s existing infrastructure.

“In general, we don’t store much on-chain,” said Aaron Lieber, IBM’s head of offering management for TradeLens. TradeLens, like many platforms, stores only hashes of data on-chain. A hash is an algorithm that transforms original data into a unique number so that the original data will always produce that unique number. A hash works only in one direction; given the unique number, it’s virtually impossible to figure out the original data. Even though enterprises cannot delete the hashes from the blockchain itself, they can retire the original data stored off-chain. According to Lieber, this design was chosen to support compliance with the European Union’s General Data Protection Regulation, which limits how long businesses can retain some data.

MediLedger, a blockchain-enabled platform for the pharmaceutical sector, requires only three readable data items for its return-verification application. This application was created to address the Drug Supply Chain Security Act of 2013, which requires that U.S. distributors first verify that returned pharmaceuticals are authentic products (not counterfeit) and that they have not expired before they are resold. (The U.S. Food and Drug Administration will continue to phase in requirements, standards, and tracking systems until November 2023.) The impact on the pharmaceutical industry will be significant: The volume of saleable returns in the United States is estimated at 2.5% of the total pharmaceutical sales volume — about 59 million pieces per year. MediLedger’s only visible data stored on-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. A smart contract ensures that only the manufacturer with the correct company identifier is allowed to add items to the lookup directory. Tech company Chronicled serves as the custodian of MediLedger; the project’s working group members include AmerisourceBergen, Amgen, Cardinal Health, Genentech, Gilead, McKesson, Pfizer, Walgreens Boots Alliance, and Walmart.

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.10 This is consistent with our own research. Enterprise applications still rely on TTPs to manage services such as operating network nodes, protecting digital wallets on behalf of clients, enforcing access rules set up by members, and managing software updates, but they no longer need TTPs to validate transactions.

EY offers managed services like smart contract testing, tokenization of assets, analytics, and tax compliance services for clients running applications on Ethereum. Enterprise participants of private networks are usually legal entities, such as registered corporations and nonprofits. Those entities may be a single organization like IBM, KoreConX, and Chronicled, or a new joint venture. Either way, there’s a new TTP.

The single-organization-led route works best when the organization is “a neutral facilitator, who can establish trust among parties, can serve as a benevolent dictator — at least initially — because they are incentivized to solve the problem for everyone,” said Susanne Somerville, CEO of Chronicled.11

The SmartResume job platform from iDatafy, which matches candidates with verified credentials to hiring organizations, is an example of a single-entity neutral facilitator. Issuers such as universities and trade schools secure an individual’s credentials on the blockchain-enabled platform. The platform aggregates all verified credentials associated with an individual to a single SmartResume. Individual résumé holders control access rights to their own résumé. Hiring organizations search for qualified candidates based only on their skills, and all demographic and personal information, such as name and gender, are masked to reduce search bias. When a hiring organization is interested in a candidate, the system sends a notification to the résumé holder. More than 60,000 SmartResumes had been created (but not necessarily activated) as of the fourth quarter of 2020.

We.Trade is an example of a joint-venture TTP. The We.Trade platform, focused on streamlining trade finance, was developed first in a sandbox by a consortium of European banks that each contributed about $200,000 in financing, with IBM Blockchain Services as the technology provider. As is typical of most consortia, the We.Trade participants maintained their own legal status and signed a very light legal commitment (a memorandum of understanding). But to move to production, the partners formally created a Dublin-based joint venture among CaixaBank, Deutsche Bank, Erste Group, HSBC, KBC, Natixis, Nordea, Rabobank, Santander, Société Générale, UBS, and UniCredit.

“We needed a legal entity before the platform went live, one with a proper board, a clear strategy, and standard rules of governance,” said Roberto Mancone, who became chief operating officer of the joint venture. As of March 2020, the platform was being used across trading partners in 19 countries, at 17 companies.12

5. First-generation solutions will need to evolve. Up to this point, blockchain-enabled applications have operated as islands, which Harvard Business School professors Marco Iansiti and Kamir Lakhani described in 2017 as the localization phase.13 Moreover, there are often multiple applications competing for the same ecosystems. For instance, in addition to We.Trade, trade finance initiatives include Marco Polo, eTradeConnect, Contour, and Komgo. And the IBM Food Trust is not the only farm-to-fork application; VeChain, OpenSC, and Grass Roots Farmers’ Cooperative are other examples.

How many trade finance and food traceability platforms will the world ultimately embrace? We already see signs of consolidation and cooperation for interoperability across platforms. For example, one early trade finance consortium, Batavia, disbanded when three banks left to join We.Trade.14 To help with interoperability across various platforms, eTradeConnect signed a memorandum of understanding with We.Trade in October 2018.15

Moving from application islands to interoperability requires global standards and new regulations. 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. The IBM Food Trust and TradeLens, for example, involved GS1 to enhance existing standards to accommodate new data requirements. GS1 is also working with the Blockchain in Transport Alliance (BiTA), which was launched in 2017 to develop data standards for the entire transportation industry. Traditional competitors like DHL, FedEx, and UPS are cooperating in the endeavor.

Dale Chrystie, blockchain strategist at FedEx and chair of the BiTA Standards Council, said, “The only way we are going to get value for the whole industry is to think differently about working together. I’ve been calling blockchain a ‘team sport’ for a few years now. We have to work with our competitors on things that improve the entire industry, like safety, quality, and reducing barriers to trade across borders.”

The Path Ahead

Blockchain has been presented as a disruptive technology that holds the potential to revolutionize tech businesses and tech landscapes. While it may certainly accelerate technology road maps, it will most likely do that as a complement to existing technology. Walmart’s leafy-greens blockchain uses bar codes, WineChain uses QR codes, and transportation blockchains use data from RFID tags and scanners. The role of blockchain in these examples is to accelerate the dissemination of data generated from existing technologies. As a result, the ROI on those existing technologies increases thanks to blockchain, and the blockchain itself becomes more valuable and data rich.

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.

Blockchain-enabled solutions are here for leaders and are coming for fast followers. Ecosystem partners need to be sold on the business vision, and the technology implementation should be relegated to the background. “Executives don’t care about blockchains,” said KoreConX’s Garimella. “It’s not blockchain that solves the problem. It’s the application sitting on the blockchain that solves the problem.”

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References

1. M. Ferguson, “Preparing for a Blockchain Future,” MIT Sloan Management Review, Sept. 11, 2018, https://sloanreview.mit.edu; L.W. Cong and F. Klotz, “Navigating the Next Wave of Blockchain Innovation: Smart Contracts,” MIT Sloan Management Review, Sept. 26, 2018, https://sloanreview.mit.edu; and T. Felin and K. Lakhani, “What Problems Will You Solve With Blockchain?” MIT Sloan Management Review 60, no. 1 (fall 2018): 32-38.

2. M. Iansiti and K.R. Lakhani, “The Truth About Blockchain,” Harvard Business Review 95, no. 1 (January-February 2017): 118-127.

3. S. Madnick, “Blockchain Isn’t as Unbreakable as You Think,” MIT Sloan Management Review 61, no. 2 (winter 2020): 66-70; and C. Catalini and P. Michelman, “Seeing Beyond the Blockchain Hype,” MIT Sloan Management Review 58, no. 4 (summer 2017): 17-19.

4.Deloitte’s 2020 Global Blockchain Survey: From Promise to Reality,” Deloitte, June 16, 2020, www2.deloitte.com.

5. For an in-depth case study on the development of TradeLens, see T. Jensen, J. Hedman, and S. Henningson, “How TradeLens Delivers Business Value With Blockchain Technology,” MIS Quarterly Executive 18, no. 4 (December 2019): 221-243.

6. M.C. Lacity, “Blockchain Foundations for the Internet of Value” (Fayetteville, Arkansas: Epic Books, 2020).

7. R. Van Hoek, B. Fugate, M. Davletshin, et al., “Integrating Blockchain Into Supply Chain Management: A Toolkit for Practical Implementation” (London: Kogan Page, 2019).

8. J.V. Micallef, “What’s in Your Cellar? Counterfeit Wines Are a Multibillion Dollar Problem,” Forbes, Dec. 1, 2018, www.forbes.com.

9. G. Perrone, “Restoring Trust in the Wine Industry, From Grape to Glass,” Ernst & Young, 2018, www.ey.com.

10. S. Gupta, S. Duncan, T. Mondal, et al., “HFS Top 10 Enterprise Blockchain Services 2020,” HFS Research, April 24, 2020.

11. S. Somerville, presentation at the Sam M. Walton College of Business Blockchain Center of Excellence Workshop, Fayetteville, Arkansas, June 6, 2019.

12. N. Morris, “Automated Trade Payments Prove Popular for We.Trade Blockchain,” Ledger Insights, January 2020, www.ledgerinsights.com.

13. Iansiti and Lakhani, “The Truth About Blockchain,” 118-127.

14. S. Wass, “We.Trade and Batavia Merge Blockchain Platforms for Trade Finance,” Global Trade Review, Oct. 3, 2018, www.gtreview.com.

15.The Launch of eTradeConnect and the Collaboration With We.Trade,” Hong Kong Monetary Authority, Oct. 18, 2018, www.hkma.gov.

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