For blockchain technology, the year 2016 was all about gaining mindshare. And now 2017 will be about gaining market share. That market share will be determined by the way business networks evolve. In this post, I’ll share lessons learned from client engagements and chalk out the key principles and considerations for designing sustainable blockchain-powered business networks to build market share.
As I’ve said in previous posts, the promise of blockchain is a trust-based business network and platform for disintermediation, leading to market and cost efficiencies. In the past few years, we’ve focused on blockchain technology maturity and consumption by enterprises and businesses to relieve pain points and pave the way for new business models. Industries and enterprises that realize the blockchain potential are now starting to reshape business networks that are burdened with the systemic costs of archaic processes, paperwork, and technology.
Business drivers and evolution
In the not-so-distant past, businesses had to run internal business systems and IT infrastructure out to the internet and harness the collaborative potential of interconnected and accessible systems. Blockchain technology takes this to the next level with true digital interaction facilitated by trusted business networks. In contrast with the internet era, where successful enterprises adopted and adapted to technological challenges, in the blockchain era, the driver for proliferation is business, rather than technology.
While blockchain technology alone is interesting, many other mechanics of a business network need to be evaluated as well, including, but not limited to:
- Consensus models: What trust system is appropriate for the business network?
- Control and governance: Which entities are allowed to do what? Who owns and begins the investigative process in the event of a system anomaly?
- Digital asset generation: Who generates the asset in the system and who governs it?
- Authority for issuance: In a truly decentralized system, the notion of authority simply does not gel. Who is responsible for governance, culpability, and eventually regulations?
- Security considerations: How will enterprise security and new security challenges imposed by a shared business network be addressed?
I envision a blockchain network that is purpose-built and focused on a plurality of business domains, such as mortgage, payments, exchanges, clearing, and settlement of a specific asset type. In an enterprise context, I envision a centralized network that is a consensus consortium between like-minded business entities. There are many practical reasons to support this vision, and they include:
- Domain-specific business language, leading to construction, management, and governance of smart contracts as proxy business representation.
- Asset type, leading to governance, management, and valuation (for exchange, fungibility, etc.) of digital representation of assets.
- Regulation, because as every industry and business network is regulated separately, the burden of adherence and related costs is shared in the business network.
- Other related business functions such as analysis, analytics, market data, etc.
Design principles for ensuring sustainability
Building on my previous post, let’s look beyond initiating a network and consider the essentials to ensure a blockchain network’s sustainability and longevity.
Now let’s look at the general considerations and technology implications of these principles. How you apply them may vary depending on your use cases and industry.
Designing for co-existence with existing systems of record
Enterprise integration, especially with adjacent systems, is an important cost consideration. Integration is not only a business consideration but also a technology consideration, due to downstream transaction systems impacting critical business systems. In my work with clients, the adjacent system integration has a significant cost impact on blockchain projects, and if it’s not addressed early in the planning stages, it can adversely affect enterprise adoption.
Operational considerations are also important. By ensuring the elements of trade, trust, and ownership — and the inherent properties of blockchain such as immutability, provenance, and consensus — a trust system can help eliminate redundant and duplicate systems and processes. These duplicated systems cost significant resources, leading to delayed transaction processing and associated opportunity costs. The goal should be to address the fundamental pain point of the existing process, leading to a flat and transparent ledger that increases trust, saves time and significant costs, and provides better client service.
Designing for network extensibility
Designing for extensibility means the implementation takes future growth into consideration. Extensibility is a systemic measure of the ability to extend a system and the level of effort required to implement the extensions. Blockchain business network design should aim for extensibility not only to accommodate the dynamic nature of business (regulation, competitive pressures, market dynamics) but also to accommodate network growth (the addition of regulators, market makers, disruptions, service providers, etc.).
Design considerations to ensure network extensibility include:
- Flexibility with membership. The network may start with a finite set of participants and roles, but new participants may want to join the network, and others may want to leave the network. The mechanics of membership changes, including access to (shared) data, must be considered. The member type is also an important consideration in the design, as the roles and type of members may change as blockchain technology either disrupts or disintermediates certain membership types.
- Compute equity. This is a fairly nascent concept as there is a divide between trust systems based on cryptocurrency and trust systems based on compute equity. The long-term sustainable infrastructure costs and maintenance are directly related to types of participants and their business interest in the business network. For instance, cost models of regulators will differ greatly from cost models of the primary beneficiary of a blockchain-powered business network.
- Shared business interests. Blockchain-powered business networks promise specific business advantages, such as reduced risk, a reliable and predictable transaction network, reduced cost of compliance, etc. But shared business interests lead to other operational considerations, such as data sharing and data ownership as the entities join and leave the network. The regulations around data ownership also change from time to time, and then there are industry requirements for the durability of data. These considerations should be evaluated in depth when designing a blockchain system.
- Governance. This is a broad topic that ranges from managing and maintaining technical artifacts such as a technology infrastructure to governing data and smart contracts in a blockchain network. It is best to layer the governance in these categories:
- Blockchain network/technology governance
- Blockchain data governance
- Blockchain smart contract governance
- Blockchain transaction management governance
The objective is to ensure that the network has not only sustainable operational elements but also sustainable business growth elements. For instance, a sustainable model would allow every participant to deploy the chaincode that governs their own business process as they accept/deal with digital assets, and put the business participants in control of the changing business processes, policies, and regulatory requirements.
Sustainability – No turning back
As blockchain-based business networks evolve and grow, there is no turning back on systemic issues such as a trust models, data visibility, and competitive advantage while exploiting the network for the shared costs of doing business.
A deep focus on sustainability is paradoxical in that it promotes open collaborative innovation while locking down some of the constructs, such as consensus or trust systems, and governance systems that govern the assets, smart contracts, and overall interaction in a multiparty transaction network. These considerations are essential for sustainable blockchain system design.
For a 4-step approach to blockchain enterprise adoption and network systems design, see my previous post, Path to blockchain enterprise adoption: A prescriptive approach.
As we debate the merits of signing the transactions vs. mining the transactions to establish trust in the network, the blockchain-powered business network is limited only by the aspirations of current business networks as they evolve. It is not a technology problem but a business ambition issue.
Successful system design of the business network must align well with the tenets of blockchain (trade, trust, ownership, and transactionality in a multi party scenario). Otherwise, business networks may never realize the promise of blockchain technology in a sustainable way. To support and sustain growth, these design considerations are paramount:
- The network participants must have control of their business.
- The network must be extensible, so that participants have flexibility in joining and leaving the network.
- The network must be permissioned but protected, in order to protect competitive data while facilitating peer-to-peer transactions.
- The network must allow open access and global collaboration for collective innovation.
- The network must be scalable for both transaction processing and encrypted data processing.
- The network must accommodate enterprise security while addressing the new security challenges of a shared business network.
- The network must co-exist with existing systems of record and transaction systems.
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Read more by Nitin Gaur
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- Blockchain for Enterprise – Focus on KYC, AML, and Regulatory Compliance – Are we Calling it RegTech?
- Path to blockchain enterprise adoption: A prescriptive approach
- Secure Blockchain Considerations for the Enterprise: Infrastructure, Blockchain Middleware, and Consensus