In general, there are three levels of blockchain utilization:
Digital Records Storage: Blockchain can be used to store digital records associated with people, organizations, assets, deeds and titles, voting rights, and anything that can be represented digitally.
Exchange of Digital Assets: Blockchain can execute peer-to-peer transactions without trusted third party intermediaries, reducing clearing and settlement time and related costs.
Documentation and Execution of Smart Contracts: Smart contracts are digital code that enables the automated execution of specified actions based on contractually agreed upon conditions that are validated by all parties. They can be designed for ownership or lease. In the instance of ownership, they enable automated smart loan payments leading to transfer of asset ownership. As a lease, they enable automated rental payments until the terms of the contract are satisfied. In that way, smart contracts can not only auto-execute recurring business transactions but also reduce contractual defaults. Blockchain contracts recorded in a blockchain are immutable. This means the quality of the code needs to be top-notch to avoid errors and fraud.
Implementation of blockchain can be classified into two types: public and permissioned. Public blockchains are open and allow anyone to confirm transactions; permissioned blockchains are only accessible to pre-approved parties.
Understanding blockchain’s competitive landscape and quantifying its potential
ecosystem, like its technology, is rapidly evolving and we are witnessing the
development of new platforms, applications, consortia, and partnerships. Many
companies are collaborating with blockchain start-ups and some of the large
players are even developing their own solutions and filing patents. In
addition, most companies are opting to be a part of a consortium, which
typically includes industry players, regulators, and governments. These
groups typically support the development of decentralized business platforms
In terms of growth and market potential, most estimates project a robust growth rate for the blockchain market in the next few years. For instance, according to one estimate from Deloitte University Press, the global blockchain technology market is expected to grow at a compounded annual growth rate (CAGR) of 62.1 percent between 2015 and 2025 to reach $16.3 billion. The potential in terms of business impact is even more optimistic. According to Gartner Research, “The business value-add of blockchain will grow to slightly more than $176 billion by 2025, and then it will exceed $3.1 trillion by 2030.”
Key drivers, challenges, and potential solutions of blockchain
The growth of
blockchain technology is driven by many factors, including:
- Lower costs of bandwidth, data storage, and computing: Like other technologies, blockchain also benefits from declining costs and rising capabilities in computing, storage, and bandwidth. This enables multiple nodes in a blockchain network to connect and act in a seamless manner while providing verification and authentication in real-time.
- More efficient way to maintain trust: With increased globalization and digitization of businesses, maintaining trust can become expensive, time consuming, and inefficient. Blockchain’s immutability would increase the reliability of data and counterparts with reduced chances of fraud, thereby increasing trust. For example, two business parties transacting would not need to maintain their own record of the transaction and would use the blockchain as a single source of truth instead.
- Prevalence of decentralized business models: Decentralized business models are becoming more common in a world of the “sharing” economy. However, these models still have large aggregators that control the information and systems, implying unequal redistribution of value among all contributors. Blockchain can democratize the value exchange in sharing-economy businesses by removing the need for centralized aggregators.
While the above factors, among others, seem to be driving blockchain’s adoption, there are certainly some challenges that should be tackled to ensure wider and smooth adoption of the technology.
- Low awareness and understanding: This might be the principal challenge related to blockchain technology. As you would imagine a significant portion of senior executives at large US organizations have little or no knowledge of blockchain. We know that the remedy to this comes from accessing existing use cases, or connect with industry associations. On the other hand, too many skeptics sit in decision-making positions and have survived by letting the other guy lead with their chin. Only in this instance, take the tried-and-true course of action and the competition will have you buried up to your neck before you know it.
- Lack of standards and best practices: There is a lack of uniform standards on blockchain technology even as new blockchain-based solutions are being developed. Again, senior executives consider technical standards as critical for wider adoption. And while industry players feel the need to collaborate better to build uniform standards and protocols rather than develop their own internal versions, they fall prey to the uniqueness of their particular needs. Blockchain is not a one-size-fits-all solution. Those substantial points of differentiation for each company within given industries pretty much guarantee they wouldn’t choose to run their solution on the same cryptocurrency platform. Not to overstate the obvious but one standard and best practice to hold firm is build your platform to manage your goals, needs, and vision. What works for Nike won't work for Reebok.
- Regulatory and legal uncertainty: As often, regulations have not kept pace with the advances in technology. Any regulation that recognizes blockchain applications, including smart contracts or digital identities, can provide a big boost to its adoption. That having been said, those who have been watching the SEC’s involvement in this industry have jaded if not overwhelming sense of anathema towards the SEC’s willingness to provide objective direction let alone summary judgment.
Blockchain Goes Beyond Financial Services
The general perception of blockchain is that the technology is primarily applicable to the financial services industry. Of course, much of this perhaps comes from more popular use cases in the cryptocurrencies and payments space as FSIs have been the early adopters. In reality, blockchain has applications across several other industries (see table below), which seem to be gradually realizing the technology’s potential.
The Last Word...
It could take a few years before we see wide commercial adoption of blockchain platforms and applications. While many challenges may remain, from lack of legal frameworks to rapid technology changes, from talent gaps to ease of consumer access with greater acceptance, it is important to not underestimate the impact of blockchain. Every transaction platform and element of this technology that exists today will likely be either improved or replaced by a blockchain-based solution. Start to build your future on blockchain or others will decide what the your future will be.
Sources: Deloitte Insights. A Technical Primer on Blockchain by Saurabh Mahajan. Febuary 6, 2018