Understanding the value, strategy, feasibility, returns, and impact involved in creating blockchain solutions requires incredible insight and expertise into how the technology can be used and its potential impact internally and for the public.
Blockchain technology itself is still relatively new with a market still in its infancy. There is not yet a clear cut recipe for success, but unlike other innovative technologies, blockchain is one where it makes sense to get in early. Without understanding what strategies will make your blockchain product viable though, it’s not likely to succeed.
This article is going to go very in-depth on the topic of strategy in blockchain, here’s a brief layout of what you’ll find here. Advanced thanks is given to researchers at BlockchainDriven and McKinsey for much of the insider information provided here.
- Value of Blockchain Technology
- Short Term ROI to Scale for Growth
- Tailoring Your Plan for Long Term Scalability
What is the value of Blockchain technology?
A lot of people call blockchain the second generation of the internet for good reason. The internet has been a place of information, a great place to publish, connect people and ideas, but with blockchain you get the internet of value.
When it comes to assets, things that really matter in the economy — money, stocks, bonds, intellectual property, votes, art, music, loyalty points, identities, and so on — sending a copy is a terrible idea. If I send you $100, it’s really important I still don’t have the money. This has been called the double-spend problem by cryptographers for a long time.
This is managed by big institutions: banks, governments, credit-card companies, and social-media companies. They perform all of the business and transaction logic of every kind of commerce. They clear and settle transactions. They identify parties, and they keep records.
But overall, there are growing problems with these intermediaries; 2008 was evidence of that. Blockchain is a global distributed ledger or database where anything of value, from money to music to votes, can be managed, transacted, and exchanged in a private and secure way without the intermediaries.
Benefits from reductions in transaction complexity and cost, as well as improvements in transparency and fraud controls can be captured by existing institutions and multiparty transactions using appropriate blockchain architecture. The economic incentives to capture value opportunities are driving incumbents to harness blockchain rather than be overtaken by it.
Short Term Value of Blockchain
Obviously when going into blockchain you need to create a scalable project, but without short term return on investment the project will not likely succeed long enough to achieve the desired growth. So how do you plan for short term returns while still growing into a project capable of disrupting an entire industry?
“Unstructured experimentation of blockchain solutions without strategic evaluation of the value at stake or the feasibility of capturing it means that many companies will not see a return on their investments.” — McKinsey
“In these early stages of blockchain adoption, this is a frequent mistake we’ve seen. Companies and startups devise a creative use case without the strategic nor technical knowledge on what the results will be, and so they don’t see the return. In the short term, much of what blockchain brings to the table is cost reduction, from there it’s easier to scale up a project.” — BlockchainDriven
For example, in supply chain that reduction of cost is incredibly evident as blockchain can eliminate discrepancies, product loss, and speed up shipping times. Blockchain offers a tamper-proof record of a product’s journey down the supply chain, but in the current system, the further down the supply chain a product travels, the less reliable data becomes. The use case in this regard clearly has short term profitability and can be scaled up to become more transformative in the future.
Rather than there being a singular form of blockchain, the technology can be configured in multiple ways to meet the objectives and commercial requirements of a particular use case.
Having a skilled blockchain solution architect who intricately understands blockchain technology to integrate the tech in a way that best matches your use case is the key to increasing feasibility.
For companies, cost reduction is one of the most successful short term goals to achieve early return on investment. This is less easily achieved in finance, government, and healthcare, but for manufacturing, supply chain, logistics, shipping, agriculture, retail, real estate, among others, the immediate benefit can be immense and executives should strategize early with capable advisors and consultants who not only understand blockchain architecture, but scalability within the technology.
“You need to start to build up some elite talent. It doesn’t necessarily need to be inside your organization. You can partner with others.” — McKinsey
Scaling Blockchain Solutions to Disrupt Industries
Both long term and short term solutions and applications need to be built in to the initial strategy. Blockchain is incredibly difficult and expensive to develop, and knowing how to achieve both short and long term profitability is going to make or break your company’s project.
An example of this would be a pharmaceutical company using blockchain for logistics of storage and distribution of say, medical supplies, drugs, blood, or organs. In the short term, the company would capitalize on reducing product loss, shipping time, increasing success rates and money from that by proxy. To scale in the future, patients could potentially commercialize data to pharmaceuticals for drug research expanding on the limited sample sizes of clinical trials and vastly improving product and time working on them.
In this example, if this company started on this early, the short term solution would not be industry changing, while the long term strategy to scale would allow them to establish industry dominance in the future. The reasoning for starting off small is simple, scaling up to that potential takes time, blockchain development is expensive as previously stated. Incorporating such strategies maximizes the chances your project will survive to achieve the massive end result.
“Over time, the value of blockchain will shift from driving cost reduction to enabling entirely new business models and revenue streams.” — BlockchainDriven
A company’s optimal strategic approach to blockchain will fundamentally be defined by the following two market factors, which are those they can least affect:
- market dominance — the ability of a player to influence the key parties of a use case
- standardization and regulatory barriers — the requirement for regulatory approvals or coordination on standards
Blockchain’s value comes from its network effects and interoperability, and all parties need to agree on a common standard to realize this value. As the technology develops, a market standard will emerge, and investments into the nondominant standard will be wasted.
Ultimately, companies will want to identify friction points that blockchain can eliminate for value from a use case. This ideation stage is a critical point and companies want to get as much insight as possible.
Once you build your blockchain network it will be incredibly difficult and implausible to make changes later. Companies should also assess if their use case will generate return. If not, that particular use case doesn’t need to be built.
Advisors working hand in hand with blockchain engineers or even better, ones that are capable of both strategy and developing, are the ones able to best produce such insights.