The Basics of Blockchain

I've been hearing about blockchain for quite some time now, and I admit I've ignored most of it. The use-cases I heard about didn't seem relevant to my business. And frankly, I didn't understand it.

But before ignoring it further, I decided I should at least understand it! Else I might wake up one day and find out someone who does understand it has replaced me in my job. Right?

First, let's start with the basics of blockchain. What is it and how does it work? I started with a McKinsey article: Blockchain beyond the hype: What is the strategic business value? which I highly recommend. If you don't have time for the 22 page article, here is my short summary.

What exactly is blockchain?

Normally I like diagrams, but telling me that transactions are saved as blocks, and everyone has a copy of all the blocks doesn't make this real for me.

Blocks of what? How can I relate to this in my day-to-day world?

So here's what helped me to understand the concept:

A blockchain is a database shared across a public or private network. EVERY member of the network has a copy of the ledger. EVERY transaction is encrypted and added as a new BLOCK to the chain of records, preventing fraud.

Here's an example in a traditional product supply chain to help make it real:

Imagine you buy and sell car parts. There is a supply chain network, keeping track of each shipment from the supplier to the end customer. If you add in the supplier, inbound freight forwarder, customs agent, wholesale customer, outbound freight forwarder, and retail customer, you easily have 6 or more separate companies who are all maintaining records for every shipment of goods in the chain. The container number, the skus, the quantities along with delivery dates are being emailed back and forth between parties in the chain. Or in a more sophisticated environment, some of the parties are using a portal where the information is hosted and you get a password to log in and look up your information. But you are likely using different portals with each supplier, customer and freight company. So there is still a lot of automated duplication.

Now imagine if everyone who touches that transaction in the supply chain gets secure access to one common network.

That's blockchain.

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Why should we pay attention to blockchain as business leaders?

Let's look at a few data points:

• Most of the hype surrounds bitcoin, which has grown from $20B to $200B in market value. (Bitcoin is an example of blockchain technology disrupting a traditional business - banks. It is a form of electronic cash, and currency is created, stored and transferred within an encrypted database managed by coders instead of a bank)
• Experts predict 10% of Global GDP will be stored on blockchain by 2027. (World Economic Forum survey)
• VC funding was up to $1billion in 2017
• IBM has $200M invested in the blockchain powered IoT (Internet of Things)

Lots of smart people are putting big money into blockchain. But estimates say only 25% of those investments will pay off. This is still an immature technology.

Here are some of the questions I have:

• As a leader in a traditional goods or service business, what will blockchain actually do for my company?
• If we are not part of the disruption that blockchain will inevitably create, when do we jump in?
• How do we evaluate the risk vs. reward for our business?

How can you answer these questions for your business? You need to start with the business case in your industry.

Initially, blockchain will deliver strategic value by reducing cost. How will blockchain reduce cost? Like any other system investment - by reducing pain points. So what are the pain points that blockchain can help reduce?

In the car parts example above, you can see there are at least 6 separate systems recording transactions, transferring information, and reconciling differences. This is the pain and cost that blockchain can eliminate.

In the short term, blockchain's strategic value is mainly in cost reduction

Imagine the savings if everyone agrees to use one database. One version of the truth, with only authorized parties having access. Nothing to reconcile, because all are using the same set of validated data.

Sounds too good to be true doesn't it? So what's the catch? Why aren't we doing this already?

Because each group in the chain has to agree to transact in the same way following the same set of rules. Easier said than done!

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So now we've defined blockchain, and might have some ideas of how it could help us eliminate pain points. What do we need to get it working?

Common standards are essential

This is the hard part in practice. Everyone has to agree to use the same set of rules on data and procedures. And share their data. Anyone who has implemented a Shared Services model across a group of companies under common ownership knows how hard it is to get companies within the same group to agree to a set of procedures. Now imagine trying to get 3rd parties and competitors to agree to a set of standards.

Natural competitors need to cooperate.

If there is a single dominant player or government agency that can mandate or take the lead, then it is easier to set standards.

What else is needed for blockchain to be viable?

• Blockchain technology must advance to be scalable and cost effective
• This one should be obvious, but assets must be able to be digitized. This makes industries like Financial services, Healthcare, and Insurance the perfect sectors for blockchain. Think about all the storage of static information that is managed and shared numerous times in these sectors, as well as transactions that are structured according to rules like insurance claims. Other high opportunity industries include Property, Public Sector, Technology, Media, Telecom and Utilities.

Over time the value of blockchain will shift from cost reductions to enabling new business models and revenue streams. Realistically, meaningful scale is still 3-5 years away. The key advantage is the network effect (having lots of players = scale and cost savings), but as the size of the network increases, so does the complexity, making it harder to standardize.

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So, what do we know so far?

 We know what blockchain is:

an encrypted database shared by a network with common interest in static data and/or a set of transactions

We know we can save money if we can eliminate pain points:

repeatedly entering the same data or reconciling the same set of transactions across multiple independent systems creates waste

How do we determine what our individual company's approach should be?

We need to find a real problem (a pain point), that costs enough money that it is worth solving. For ourselves, and others in the group. We can't lose sight of the basic principles of investment - there needs to be a business case.

• What will it cost? (The cost of the database and setting up standards, split amongst the network)
• How much money will it save? (what are the costs that the network can eliminate/reduce)
• Does it payback? (and if not now, when?)

Obviously, if you jump in too early, you risk losing money on the investment. If you jump in too late, you could get locked out of the network. Deciding when to start depends on your market dominance, and the level of standards and barriers.

Based on this chart - if you are a MARKET LEADER in your industry - you need to get on board with blockchain NOW before someone else eats your lunch. If you aren't leading in this space, a disruptor will. They probably won't call to invite you to the party.

If you are a FOLLOWER in your industry, you need to be aware of what the leaders are doing, and be ready to join in quickly.

If you are an ATTACKER, you already understand how to use blockchain, but if you are going it alone, you should consider partnering with someone who already has dominance to leverage their influence in the industry. They already have scale - which you need.

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In summary, here's the Blockchain Basics cheat sheet:

• If you are in any business, blockchain will likely impact your world in a BIG way in the next 3-5 years, so you need to pay attention
• Blockchain is an encrypted shared database that will allow a group of companies to securely access the same set of data
• Initially blockchain will focus on reducing costs, over time it will disrupt revenue models and change businesses entirely
• If you are not in the network at the beginning, you may not be able to join in later
• To decide how and when to get in, you need to look for the pain points to identify opportunities to reduce costs
• If you are a small player, look for a group to form an alliance to stay informed

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What experience does your business have in using blockchain? Let me know!

I'm interested to learn more about this field. Connect with me!

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