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W hen people interact with each other, for example via financial
transactions, sharing legal docu-ments or trading through supply
chains, they need a high level of confidence that the data
recording their interaction is accurate and true.
A distributed ledger makes it possible to build applications
where multiple parties can execute transactions online without
the need to trust a central authority or indeed each other.
Over the past few years, the number of use cases for distributed
ledgers, and their more specialised form, blockchains, has been
increasing, as has the technology to support the underlying
infra-
structure and build applications on top of it.
With a distributed ledger, every user has their own full, or in
some
cases partial, copy of the database, referred to as a node, which
can be a physical device, a virtual machine or a software
container.
Each node runs the relevant software to provide the infrastruc-
ture management and the relevant application, including the
ability to complete “smart contracts” that negotiate the direct
exchange of assets between participating nodes.
consensus
For a transaction to proceed, all nodes must verify a transaction
and agree its order on the ledger.
Doing so is termed “consensus”, which is necessary, for exam-
ple, to avoid double counting or overspending when it comes to
financial assets.
Consensus involves four steps, from the transaction being
initiated to it being committed on all nodes with a timestamp
InsIde blockchaIn and Its
varIous applIcatIons
Bob Tarzey explores the technology around
blockchain shaping how businesses use data
BUYER’S GUIDE TO BLOCKCHAIN | PART 2 OF 3
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providing a unique cryptographic signature. These steps can be
completed in seconds or minutes, depending on the technology.
Blockchains are distinguished from other distributed ledgers in
being updated by adding blocks of new transactions to create an
immutable tamper-proof log of sensitive activity.
The right to write blocks may require proof-of-work – which
can be time and resource intensive – the aim being to prevent,
for
example, mass updates by bots.
Nomenclature has become confusing as the two terms, dis-
tributed ledger and blockchain, have been used interchangeably,
with the latter prevailing, being punchier and, perhaps,
sounding
more contemporary.
public or private
Blockchains can either be public or private and require permis-
sion to update or not. Use cases range from international money
transfers, managing shareholder records and legal contracts to
recording the provenance of gemstones and the condition of
goods in transport.
To date, the most high-profile use of blockchain has been to
oper-
ate cryptocurrencies, a way of exchanging and storing value
online
independent of central banks. From this has involved initial
coin
offerings (ICO), a way of using cryptocurrencies as an
alternative
to initial public offerings (IPO) for companies to raise capital.
With the oldest and highest profile blockchain application,
bitcoin, it can take many minutes for consensus to be reached,
which is why the cryptocurrency has a reputation for poor
perfor-
mance and scalability. It is also criticised for the datacentre
power
it consumes in a process called mining, the form of proof-of-
work,
rewarded with bitcoins, used to add new blocks of transactions
to
the bitcoin blockchain.
As the use of blockchains has extended to other use cases, the
aim has been to overcome these deficiencies.
Different approaches are enabled through frameworks which
provide the basic architecture, protocol and network support.
Frameworks simplify the development, deployment and sup-
port of applications that access a given blockchain. There are
several blockchain frameworks which compete and/or address
different requirements.
Frameworks
The most widely used is Ethereum, an open source public block-
chain framework. The first implementations were in 2015, but it
is
already thought to account for 80% of blockchain-based
projects.
Ethereum suits highly distributed requirements where the
transparency of data to all users is important – for example, a
customer loyalty network where retailers need to independently
verify a user’s activity to provide benefits.
Ethereum was the first platform to enable full-fledged smart
contracts, which, for example, makes it quick and easy to
launch
ICOs. Ethereum is also the name of a cryptocurrency based on
the platform.
The Linux Foundation’s Hyperledger Fabric is an open source
enterprise private blockchain framework suited to applications
that require privacy and permission controls with a known set
of members – for example, a financial application where certain
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trade-related data is only shared with select banks. In effect, it
is
a hub for the open development of blockchains for solving cor-
porate tasks.
The project started in 2015 and has more than 100 participating
companies which pay a membership fee, starting at $50,000 per
annum, enabling them to contribute software code to the
project.
Waves is an open source blockchain platform created by a
Russian company specifically for launching ICOs; a distant sec-
ond to Ethereum for doing this. It includes a decentralised
trading
exchange. Ripple is an open source platform used as an
international
currency exchange for both cryptocurrencies and fiat currencies.
It
is designed to allow fast and cheap international transactions.
The NEM Foundation’s platform claims the scalability and per-
formance to suit a range of use cases, including financial pay-
ments, cryptocurrencies, equity markets and escrow services,
using a consensus algorithm called proof-of-importance that
provides privileges to participants with the best reputations.
smart contract platForm
EOS is a smart contract platform and decentralised operating
system intended for the deployment of industrial-scale appli-
cations. It aims to eliminate transaction fees and be highly
scalable. R3’s Corda operates smart contracts, within the Java
Virtual Machine, and is aimed at financial institutions. Iota is
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an open source distributed ledger, customised to work with
internet of things (IoT) applications providing feeless micro-
transactions. JP Morgan’s Quorum is Ethereum-based, claiming
enterprise scalability and the ability to limit access to transac-
tion history, while providing maximum transparency.
blockcHain as a service
Quorum has recently been selected by Microsoft as the first
supported framework for its managed Azure Blockchain
Service.
The aim of such managed, blockchain-as-a-service offerings is
to avoid self-hosting of blockchain infrastructure, eliminating
the
need to provision hardware, configure software and set up net-
working and security components, as well as ease the develop-
ment of applications on top of one or more frameworks.
The Microsoft Azure Blockchain Service was launched earlier
in 2019, on top of earlier releases of a blockchain development
kit and workbench. It integrates with Microsoft’s Active
Directory
and Visual Studio, as well as a range of open source tools.
The Amazon Managed Blockchain was launched in December
2018 and supports both Hyperledger Fabric and Ethereum.
Amazon Web Services (AWS) claims it enables the rapid
creation
of new blockchain networks that can span multiple AWS
accounts,
that can automatically scale to meet the demands of thousands
of
applications. It monitors the network and automatically replaces
poorly performing nodes assigning processing power and mem-
ory flexibly, as would be expected on a managed platform.
The launch of the service means AWS now competes with some
of its platform partners, such as ConsenSys’s Kaleido.
The IBM Blockchain Platform, launched in 2017, is based on
Hyper Ledger. It can be run on-premise or as a cloud service on
a
customer-chosen platform and includes a set of security services
suited to the requirements of enterprise customers. Oracle also
released a blockchain platform based on Hyperledger Fabric in
February 2019.
specialist requirements
Alongside some of the IT industry’s biggest names, many
smaller, niche players are coming to market to serve specialist
requirements and applications relating to blockchain.
Gospel Technology is a private permissioned blockchain aimed
at safe data sharing. Use cases include human resources systems
and pharmaceutical testing. To this end, it provides consensus
on
reads, as well as writes, ensuring that it is opaque about data,
but
open about who has accessed it.
Because Gospel is focusing on content as much as transactions,
the data volumes involved can be high, so network nodes can
store
a subset of the data relevant to their needs. This also means it
can
make use of Byzantine fault tolerance, meaning it can continue
to
operate even if the status of certain nodes is unknown.
Gospel has just launched a version on the Google Cloud
Platform, however, customers can use other platforms such as
AWS or Azure.
Modum is a Switzerland-based company currently operating
mainly in Germany – with global plans. It partners with AWS
and
SAP. Its offering aims to automate, integrate and digitise supply
chains, the initial focus market being pharmaceuticals.
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How 5G will transform
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Modum provides an IoT-type device with a data logger to be
included with transported goods to monitor environmental con-
ditions, such as temperature and humidity to prove compliance
with good distribution practices.
The data collected can be immutably secured in a blockchain
and shared with stakeholders to add a layer of trust.
Fraud prevention
Tomia specialises in fraud prevention, traffic optimisation and
roaming insights for mobile carriers. It provides real-time
analyt-
ics and recently announced a partnership with Microsoft, KPMG
and R3 to provide a blockchain-based system to optimise
dispute
management and help resolve billing and settlement disputes.
Quant Network’s Overledger is a blockchain operating sys-
tem providing the ability for applications to interact with mul-
tiple blockchains.
The need for many-to-many relationships between applications
and databases is not new: it was one that had to be addressed in
the 1980s and 1990s with the rising use of relational databases.
Standards were introduced and the market consolidated. This
is what will happen in the world of blockchains. Furthermore,
blockchain is not a panacea: it will never suit many applications
where central control, extremely high speed or the mass storage
of unstructured data are required.
Blockchain merely provides another choice in the range of
database options available. n
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Record: 1
Blockchain beyond the hype: What is the strategic business
value?
Carson, Brant
Romanelli, Giulio
Walsh, Patricia
Zhumaev, Askhat
McKinsey Quarterly. 2018, Issue 4, p118-127. 10p. 1 Color
Photograph, 1 Diagram.
Article
*BLOCKCHAINS
*DECENTRALIZATION in management
*TRANSPARENCY in organizations
*BUSINESS models
*COST control
*STRATEGIC planning
The authors discuss their study on the strategic business
value of blockchain to major industries. They described a
structured approach that companies can follow to examine
blockchain strategies. The core advantages of blockchain are
decentralization, cryptographic security, transparency, and
immutability. It is said that the value of blockchain will shift
from driving cost reduction to enabling entirely new business
models and revenue streams.
Partner, McKinsey's Sydney office
Associate partner, Melbourne office
Consultant, Melbourne office.
2881
0047-5394
133693412
Business Source Premier
Blockchain beyond the hype: What is the strategic business
value?
Blockchain can generate meaningful value for many companies.
The key is figuring out what
strategy makes sense, given your customers' pain points and
your company's market
position
Blockchain is all the rage. Bitcoin-the first and most infamous
application of the technology-has
grabbed headlines for its rocketing price and volatility.
Predictions such as the World Economic
1
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Forum survey suggesting that 10 percent of global GDP will be
stored on blockchain by 2027 have
inspired government task forces, breathless press reports, and a
multitude of conversations at
Davos and in corporate conference rooms.[ 1]
Tellingly, large investments are being made. Last year, venture
capitalists put more than $1 billion
into blockchain start-ups.[ 2] Initial coin offerings (ICOs), the
blockchain-backed sale of
cryptocurrency tokens in a new venture, raised $5 billion in
2017. Leading technology players are
putting money and people into blockchain: IBM has invested
$200 million and more than 1,000
employees in the blockchain-powered Internet of Things (IoT).[
3]
Yet the fact remains that blockchain is an immature technology
with a nascent market and no clear
recipe for success. No wonder many corporate leaders are
asking themselves a lot of questions. Is
blockchain a disruptive threat? Is it a fad? Most importantly,
can blockchain have strategic value for
my company?
To help answer these questions, we embarked on an industry-
by-industry analysis of existing
blockchain strategies, interviewing a range of experts including
the executives overseeing these
efforts at a number of companies. We evaluated the strategic
importance of blockchain to major
industries and identified who can capture what type of value
through what type of approach. Our
research led us to three key insights on the strategic value of
blockchain:
• Blockchain does not have to be a disintermediator to generate
value.
• Blockchain's short-term value will be predominantly in
reducing cost.
• Commercially viable blockchain solutions deployed at scale
are three to five years away for most
companies.
In this article, we'll explain how we arrived at these insights
and we'll describe a structured approach
companies can follow to evaluate blockchain strategies. Some
organizations may discover ways to
extract value from blockchain in the short term. Dominant
companies may discover even more: if
they are willing to invest now to establish their blockchains as
market solutions, they can cement
their leadership and forestall the incursion of disruptive digital
natives.
WHAT IS BLOCKCHAIN?
Blockchain is not synonymous with Bitcoin, which is just one
cryptocurrency application that uses it.
Blockchain is a distributed ledger, or database, shared across a
public or private computing network.
Each computer node in the network holds a copy of the ledger,
so there is no single point of failure.
Every piece of information is mathematically encrypted and
added as a new "block" to the chain of
historical records. Various consensus protocols are used to
validate a new block with other
participants before it can be added to the chain. This prevents
fraud or double spending without
requiring a central authority. The ledger can also be
programmed with "smart contracts," a set of
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conditions recorded on the blockchain, so that transactions
automatically trigger when the conditions
are met. For example, smart contracts could be used to automate
insurance-claim payouts.
Blockchain's core advantages are decentralization,
cryptographic security, transparency, and
immutability. It allows information to be verified and value to
be exchanged without having to rely on
a third-party authority. 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. Indeed, our research focused on more than 90 discrete use
cases of varying maturity for
blockchain across industries. To clarify this variety of
applications, we structured use cases into six
categories across blockchain's two fundamental functions:
record keeping and transacting. Some
industries have applications across multiple categories, while
others concentrate on one or two.
Blockchain's disruptive potential lies partly in its technology,
which eliminates the need for an entity
to be in charge of managing, storing, and funding a database. A
public blockchain, such as Bitcoin,
has no central authority. This peer-to-peer model can become
commercially viable due to
blockchain's ability to compensate participants' contributions
with "tokens" (application-specific
cryptoassets), as well as with a stake in any future increases in
the value. As a result, public
blockchains can foster total disruptive disintermediation.
However, as we explain in the following
section, smart incumbent companies willing to engage with
blockchain now can use the technology
to prevent disintermediation.
THREE BLOCKCHAIN TRUTHS TO HELP SHAPE YOUR
STRATEGY
Incumbents looking to defend against disintermediation-or to go
on the offensive themselves-should
start by understanding three key insights.
'Permissioned' blockchains generate value and ward off
disintermediation
The commercial model that is most likely to succeed in the
short term is a different kind of
blockchain, a "permissioned" one, with controlled access and
editing rights (exhibit). In this model,
participants can benefit from securely sharing data while
automating control of what is shared, with
whom, and when. Equipped with meaningful transparency and
fraud controls, these permissioned
blockchains help existing companies reduce the complexity and
cost of multiparty transactions. It's a
way for incumbents to harness blockchain rather than be
overtaken by it. Dominant players can
maintain their positions as central authorities or join forces with
other industry players to capture and
share value.
Permissioned blockchains allow companies to develop
distinctive value propositions in commercial
confidence, with small-scale experimentation preceding scaled
executions. At the Australian
Securities Exchange, for example, a blockchain system is being
deployed for equities clearing to
reduce back-office reconciliation work for its member brokers.[
4] IBM and Maersk Line, the world's
largest shipping company, are working together to create a
blockchain platform that would provide
traders with a secure, real-time exchange of supply-chain data
and paperwork.[ 5]
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The potential for blockchain to become a new open-standard
protocol for use cases such as trusted
records, identity, and transactions offers incumbents a powerful
safeguard against disintermediation.
Industry players greatly reduce the aperture for radical new
entrants by learning to extract value
from blockchain, especially if that value benefits customers.
The degree to which incumbents adapt
and integrate blockchain technology will determine its
disruptive force in their industry.
In the short term, blockchain's strategic value is mainly in cost
reduction
Initially, blockchain will drive operational efficiencies. It takes
cost out of existing processes by
removing intermediaries and rationalizing administrative
processes such as record keeping and
transaction reconciliation. In the cases we analyzed,
approximately 70 percent of the value at stake
in the short term was in cost reduction.
Certain industries' fundamental functions are inherently more
suited to blockchain solutions. The
core functions of financial-services firms, for example, such as
verifying and transferring financial
information and assets, align closely with blockchain's core
transformative impact. This explains why
approximately 90 percent of major Australian, European, and
North American banks are already
experimenting or investing in blockchain. Governments, too,
can reap considerable savings by
putting key record-keeping and verifying functions onto
blockchain infrastructure. From birth
certificates to taxes, blockchain-based records and smart
contracts can simplify interactions with
citizens and increase data security. More than 25 governments
are actively running blockchain pilots
supported by start-ups. In healthcare, blockchain applications
could unlock the value of data
availability and exchange for providers, patients, insurers, and
researchers. Blockchain-based
healthcare records can improve administrative efficiency and
give researchers access to the
historical, patient-identity-protected data sets crucial for
advancements in medical research.
Significant, scaled commercial applications are likely three to
five years away
Over time, the value of blockchain will shift from driving cost
reduction to enabling entirely new
business models and revenue streams. One promising use case is
the creation of a distributed,
secure digital identity. This could be helpful for individuals and
lucrative for companies, which could
customize services to people who grant them access in ways we
can't imagine now. But these kinds
of new businesses are more of a long-term possibility than a
nearterm reality. Why? Because time is
needed for four key factors to mature: standards and
regulations, technology, asset digitization, and
ecosystem.
Common standards must be developed. The lack of common
standards and clear regulations can
be a major limitation on the scalability of blockchain
applications. When cooperation between
multiple players is necessary, establishing such standards is as
complex as it is critical. Industry
consortia, such as the 70-bank group that collaborated to
develop the financial-grade open-source
Corda blockchain platform, will be needed to establish common
standards. That kind of work is time-
consuming.
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Thankfully, regulators are generally engaged rather than
opposed or unaware. The US Securities
and Exchange Commission, for example, is bringing ICOs under
the agency's regulation and into
the mainstream.[ 6]
Technology must advance. The immaturity of blockchain
technology is a major concern for
companies today. Organizations need a trusted enterprise
solution, particularly because they may
not realize the cost benefits of blockchain until their old
systems are decommissioned. Currently, few
startups have sufficient credibility, technology stability, or
industry expertise for government or
industry deployment at scale. Major technology players are
positioning themselves to address this
gap with blockchain-as-a-service (BaaS) offerings in a model
similar to cloud-based storage.
Assets must be digitally connected. Assets such as equities,
which are digitally recorded and
transacted, can be simply managed end to end on a blockchain
system or integrated through
application programming interfaces (APIs) with existing
systems. However, connecting and securing
physical goods to a blockchain requires enabling technologies
like IoT and biometrics. This
connection can be a vulnerability in the security of a blockchain
ledger.[ 7] While the blockchain
record might be immutable, the physical item or IoT sensor can
be tampered with. Certifying the
chain of custody of commodities such as grain or milk, for
example, would require a tagging system
like radio-frequency identification, which could increase
assurance even if it couldn't deliver absolute
provenance.
The coopetition paradox must be resolved. Blockchains become
more valuable with more
participants, but they also become more complex to coordinate.
For example, a blockchain solution
for digital media, licenses, and royalty payments requires
massive coordination among producers
and consumers of digital content. Resolving this paradox of
natural competitors having to cooperate
is the toughest of these four factors. The issue is not identifying
the network-or even getting initial
buy-in-but agreeing on the governance decisions around how the
system, data, and investment will
be led and managed. The strategic incentives of the players
must be aligned, a task that can be
particularly difficult in highly fragmented markets. Overcoming
this issue often requires a sponsor,
such as a regulator or industry body, to take the lead.
A STRUCTURED WAY TO DEVELOP BLOCKCHAIN
STRATEGY
Fear of missing out on a new technology sometimes leads
companies to develop solutions to
problems that don't exist. We believe companies can avoid this
trap through a structured approach
to blockchain.
First, identify and skeptically assess a specific use case that can
create value. Most companies can
find use cases by taking a close look at the pain points affecting
their industry and their customers.
Companies can decide whether these cases are feasible by
considering a variety of factors, such as
its capability to design a blockchain solution, technology and
asset constraints, and the potential for
passing on benefits and savings to customers. If a use case does
not meet a minimum level of
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feasibility and potential return, then companies should avoid
launching a project just to "be in the
game."
Companies that have identified a promising use case, however,
will move on to the second part of
our structured approach: understanding how their market
position will impact that target use case.
Part of blockchain's value comes from its network effects and
interoperability, and all parties need to
agree on a common standard to realize this value- multiple
siloed blockchains provide little
advantage over multiple siloed databases. As the technology
develops, a market standard will
emerge and investments into the nondominant standard will be
wasted. Coordination with other
industry players is critical. That's why a company's market
dominance, or lack thereof, affects its
ability to influence other key players in the industry and to help
shape standardization and regulatory
barriers. Here's how market position shapes blockchain strategy.
Leaders: Build on existing strengths
Leaders are dominant players in industries with few
requirements for coordination and regulatory
approval. These companies should pursue use cases now. They
have the potential to create
solutions that can solidify their market position and set industry
standards. The greatest risk for
these companies is inaction, which could open a competitive
window for disruptors.
Change Healthcare is an example of a company taking
advantage of its market leadership. One of
the largest independent healthcare IT companies in the United
States, it launched an enterprise-
scale healthcare blockchain for claims processing and payment.[
8]
Conveners: Shape standards to gain an edge
Conveners are dominant players who cannot single-handedly
direct blockchain adoption, since they
operate in industries with considerable regulatory and
standardization barriers. Conveners need to
drive the conversations and consortia that will shape the new
standards poised to disrupt their
current businesses. Then they can position themselves to shape
and capture the value of new
blockchain standards.
Convening tactics should be deployed for high-value use cases,
such as trade finance, that cannot
be realized without a broadly shared set of standards. An
example of a convener following this
strategy is Toyota, whose Research Institute set up the
Blockchain Mobility Consortium with four
global partners to focus on blockchain solutions for critical
accelerators of autonomous vehicles:
data sharing, peer-to-peer transaction, and usagebased
insurance.[ 9]
Followers: Stay informed and be ready to move fast
Most companies are followers, in the sense that they lack the
power to influence all necessary
parties, especially when applications of blockchain require high
standardization or regulatory
approval. But followers cannot afford to ignore blockchain.
They must be informed about market
innovations, keeping a close watch on blockchain developments.
They should also be prepared to
move fast to adopt emerging standards. Just as businesses have
developed risk and legal
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frameworks for adopting cloudbased services, companies should
focus on developing a strategy for
how they will implement and deploy blockchain technology.
Followership is risky, given the ability of dominant players to
establish private-permissioned
networks. A follower, no matter how fast, may find itself locked
out of the exclusive club that
establishes the initial proof of concept. Companies can mitigate
this risk by joining select existing
and emerging consortia early. The short-term investment costs
of membership are often outweighed
by the long-term costs of getting left behind.
Attackers: Leverage their market leadership
Attackers are often new market entrants without an existing
market share to protect, armed with
disruptive or transformative business models and blockchain
solutions. Attackers offer a service
intended to disintermediate existing players. Most peer-to-peer
applications, from finance to
insurance to property, fall into this category. A good example of
an attacker is Australian start-up
Power Ledger, a peer-to-peer marketplace for renewable energy
that raised 34 million Australian
dollars through its ICO.[10] Sometimes, companies pursuing an
attacker strategy will try to partner
with a dominant company in the market to leverage their
leadership influence.
Incumbents can deploy an attacker's blockchain strategy in a
separate, noncore digital business.
Blockchain-as-a-service (BaaS) providers, for example, often
adopt an attack strategy when they try
to sell services into industries where they currently do not
participate.
Blockchain has strategic value for many companies. In the short
term, the technology can reduce
costs without disintermediation, and in the long run it can
create new business models. Existing
digital infrastructure and the growth of BaaS offerings have
lowered the costs of experimentation.
However, a variety of fundamental factors limit the scalability
of many use cases and extend the
amount of time needed for return on investment on proof of
concepts.
Assessing these factors with pragmatic skepticism about the
scale of impact and speed to market
will help reveal the correct strategic approach on where and
how companies can extract value in the
short term. Dominant players, however, have an enormous
opportunity to establish their blockchain
as the market solution. They should be making those moves
now.
1 Deep shift: Technology tipping points and societal impact,
World Economic Forum, September
2015, weforum.org.
2" Blockchain startups absorbed 5X more capital via ICOs than
equity financings in 2017," CB
Insights, January 2018, cbinsights.com.
3 " IBM invests to lead global Internet of Things market-shows
accelerated client adoption," IBM,
October 2016, ibm.com.
4"ASX selects distributed ledger technology to replace
CHESS," ASX, December 2017.
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5-4fdf-488e-afce-023afbccdded%40...
5" Maersk and IBM to form joint venture applying blockchain
to improve global trade and digitize
supply chains," IBM, January 2018, ibm.com.
6 Jay Clayton, "Statement on cryptocurrencies and initial coin
offerings," U.S. Securities and
Exchange Commission, December 2017, sec.gov.
7 To be sure, blockchain does not eliminate the possibility of
fraudulent data being written to the
database, which could in turn be used to substantiate the
existence of fraudulent assets.
8 "Change Healthcare announces general availability of first
enterprise-scale blockchain solution for
healthcare," Change Healthcare, January 2018,
changehealthcare.com.
9 "Toyota Research Institute explores blockchain technology for
development of new mobility
ecosystem," Toyota, May 2017, toyota.com.
"Power Ledger token generation event closes with A$34million
raised," Power Ledger, October
2017, web.powerledger.io.
DIAGRAM: Exhibit. Private, permissioned blockchain
architecture offers a way to optimize network
openness and scalability. Blockchain-architecture options
PHOTO (COLOR)
~~~~~~~~
By Brant Carson; Giulio Romanelli; Patricia Walsh and Askhat
Zhumaev
Copyright of McKinsey Quarterly is the property of McKinsey
& Company, Inc. and its content may
not be copied or emailed to multiple sites or posted to a listserv
without the copyright holder's
express written permission. However, users may print,
download, or email articles for individual use.
Page 8 of 8UC MegaSearch
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computerweekly.com 17-23 September 2019 16W hen people int.docx

  • 1. computerweekly.com 17-23 September 2019 16 W hen people interact with each other, for example via financial transactions, sharing legal docu-ments or trading through supply chains, they need a high level of confidence that the data recording their interaction is accurate and true. A distributed ledger makes it possible to build applications where multiple parties can execute transactions online without the need to trust a central authority or indeed each other. Over the past few years, the number of use cases for distributed ledgers, and their more specialised form, blockchains, has been increasing, as has the technology to support the underlying infra- structure and build applications on top of it. With a distributed ledger, every user has their own full, or in some cases partial, copy of the database, referred to as a node, which can be a physical device, a virtual machine or a software container. Each node runs the relevant software to provide the infrastruc- ture management and the relevant application, including the ability to complete “smart contracts” that negotiate the direct exchange of assets between participating nodes. consensus For a transaction to proceed, all nodes must verify a transaction and agree its order on the ledger.
  • 2. Doing so is termed “consensus”, which is necessary, for exam- ple, to avoid double counting or overspending when it comes to financial assets. Consensus involves four steps, from the transaction being initiated to it being committed on all nodes with a timestamp InsIde blockchaIn and Its varIous applIcatIons Bob Tarzey explores the technology around blockchain shaping how businesses use data BUYER’S GUIDE TO BLOCKCHAIN | PART 2 OF 3 G O LD EN S IK O R K A /A D O B
  • 3. E Home http://www.computerweekly.com https://searchcio.techtarget.com/definition/blockchain https://searchservervirtualization.techtarget.com/definition/virtu al-machine https://www.techtarget.com/contributor/Bob-Tarzey computerweekly.com 17-23 September 2019 17 Home News How IT departments can find different ways to upskill in the new economy Travel company Clarity bakes ThoughtSpot search and AI functions into analytics tool Digital factory approach signals a new departure for Network Rail’s IT strategy Editor’s comment Buyer’s guide to blockchain
  • 4. Delivering cloud in the financial services sector How 5G will transform your business Downtime providing a unique cryptographic signature. These steps can be completed in seconds or minutes, depending on the technology. Blockchains are distinguished from other distributed ledgers in being updated by adding blocks of new transactions to create an immutable tamper-proof log of sensitive activity. The right to write blocks may require proof-of-work – which can be time and resource intensive – the aim being to prevent, for example, mass updates by bots. Nomenclature has become confusing as the two terms, dis- tributed ledger and blockchain, have been used interchangeably, with the latter prevailing, being punchier and, perhaps, sounding more contemporary. public or private Blockchains can either be public or private and require permis- sion to update or not. Use cases range from international money transfers, managing shareholder records and legal contracts to recording the provenance of gemstones and the condition of goods in transport. To date, the most high-profile use of blockchain has been to oper-
  • 5. ate cryptocurrencies, a way of exchanging and storing value online independent of central banks. From this has involved initial coin offerings (ICO), a way of using cryptocurrencies as an alternative to initial public offerings (IPO) for companies to raise capital. With the oldest and highest profile blockchain application, bitcoin, it can take many minutes for consensus to be reached, which is why the cryptocurrency has a reputation for poor perfor- mance and scalability. It is also criticised for the datacentre power it consumes in a process called mining, the form of proof-of- work, rewarded with bitcoins, used to add new blocks of transactions to the bitcoin blockchain. As the use of blockchains has extended to other use cases, the aim has been to overcome these deficiencies. Different approaches are enabled through frameworks which provide the basic architecture, protocol and network support. Frameworks simplify the development, deployment and sup- port of applications that access a given blockchain. There are several blockchain frameworks which compete and/or address different requirements. Frameworks The most widely used is Ethereum, an open source public block- chain framework. The first implementations were in 2015, but it is
  • 6. already thought to account for 80% of blockchain-based projects. Ethereum suits highly distributed requirements where the transparency of data to all users is important – for example, a customer loyalty network where retailers need to independently verify a user’s activity to provide benefits. Ethereum was the first platform to enable full-fledged smart contracts, which, for example, makes it quick and easy to launch ICOs. Ethereum is also the name of a cryptocurrency based on the platform. The Linux Foundation’s Hyperledger Fabric is an open source enterprise private blockchain framework suited to applications that require privacy and permission controls with a known set of members – for example, a financial application where certain BUYER’S GUIDE http://www.computerweekly.com https://www.computerweekly.com/news/252465373/Facebook- officially-unveils-cryptocurrency-plans https://searchbusinessanalytics.techtarget.com/news/252469508/ ThoughtSpot-BI-platform-gets-financial-boost-IPO-may-be-near https://whatis.techtarget.com/definition/Ethereum https://searchdatamanagement.techtarget.com/feature/Hyperledg er-Fabric-offers-path-to-enterprise-blockchain-future computerweekly.com 17-23 September 2019 18 Home News
  • 7. How IT departments can find different ways to upskill in the new economy Travel company Clarity bakes ThoughtSpot search and AI functions into analytics tool Digital factory approach signals a new departure for Network Rail’s IT strategy Editor’s comment Buyer’s guide to blockchain Delivering cloud in the financial services sector How 5G will transform your business Downtime trade-related data is only shared with select banks. In effect, it is a hub for the open development of blockchains for solving cor- porate tasks. The project started in 2015 and has more than 100 participating companies which pay a membership fee, starting at $50,000 per
  • 8. annum, enabling them to contribute software code to the project. Waves is an open source blockchain platform created by a Russian company specifically for launching ICOs; a distant sec- ond to Ethereum for doing this. It includes a decentralised trading exchange. Ripple is an open source platform used as an international currency exchange for both cryptocurrencies and fiat currencies. It is designed to allow fast and cheap international transactions. The NEM Foundation’s platform claims the scalability and per- formance to suit a range of use cases, including financial pay- ments, cryptocurrencies, equity markets and escrow services, using a consensus algorithm called proof-of-importance that provides privileges to participants with the best reputations. smart contract platForm EOS is a smart contract platform and decentralised operating system intended for the deployment of industrial-scale appli- cations. It aims to eliminate transaction fees and be highly scalable. R3’s Corda operates smart contracts, within the Java Virtual Machine, and is aimed at financial institutions. Iota is BUYER’S GUIDE A LE X /A D O
  • 9. B E http://www.computerweekly.com https://www.computerweekly.com/news/252439085/Santander- uses-Ripple-technology-to-offer-international-payments https://www.theserverside.com/news/252447729/Developers- favor-JVM-languages-for-mobile-enterprise https://www.theserverside.com/news/252447729/Developers- favor-JVM-languages-for-mobile-enterprise computerweekly.com 17-23 September 2019 19 Home News How IT departments can find different ways to upskill in the new economy Travel company Clarity bakes ThoughtSpot search and AI functions into analytics tool Digital factory approach signals a new departure for Network Rail’s IT strategy Editor’s comment
  • 10. Buyer’s guide to blockchain Delivering cloud in the financial services sector How 5G will transform your business Downtime an open source distributed ledger, customised to work with internet of things (IoT) applications providing feeless micro- transactions. JP Morgan’s Quorum is Ethereum-based, claiming enterprise scalability and the ability to limit access to transac- tion history, while providing maximum transparency. blockcHain as a service Quorum has recently been selected by Microsoft as the first supported framework for its managed Azure Blockchain Service. The aim of such managed, blockchain-as-a-service offerings is to avoid self-hosting of blockchain infrastructure, eliminating the need to provision hardware, configure software and set up net- working and security components, as well as ease the develop- ment of applications on top of one or more frameworks. The Microsoft Azure Blockchain Service was launched earlier in 2019, on top of earlier releases of a blockchain development kit and workbench. It integrates with Microsoft’s Active Directory and Visual Studio, as well as a range of open source tools. The Amazon Managed Blockchain was launched in December
  • 11. 2018 and supports both Hyperledger Fabric and Ethereum. Amazon Web Services (AWS) claims it enables the rapid creation of new blockchain networks that can span multiple AWS accounts, that can automatically scale to meet the demands of thousands of applications. It monitors the network and automatically replaces poorly performing nodes assigning processing power and mem- ory flexibly, as would be expected on a managed platform. The launch of the service means AWS now competes with some of its platform partners, such as ConsenSys’s Kaleido. The IBM Blockchain Platform, launched in 2017, is based on Hyper Ledger. It can be run on-premise or as a cloud service on a customer-chosen platform and includes a set of security services suited to the requirements of enterprise customers. Oracle also released a blockchain platform based on Hyperledger Fabric in February 2019. specialist requirements Alongside some of the IT industry’s biggest names, many smaller, niche players are coming to market to serve specialist requirements and applications relating to blockchain. Gospel Technology is a private permissioned blockchain aimed at safe data sharing. Use cases include human resources systems and pharmaceutical testing. To this end, it provides consensus on reads, as well as writes, ensuring that it is opaque about data, but open about who has accessed it. Because Gospel is focusing on content as much as transactions,
  • 12. the data volumes involved can be high, so network nodes can store a subset of the data relevant to their needs. This also means it can make use of Byzantine fault tolerance, meaning it can continue to operate even if the status of certain nodes is unknown. Gospel has just launched a version on the Google Cloud Platform, however, customers can use other platforms such as AWS or Azure. Modum is a Switzerland-based company currently operating mainly in Germany – with global plans. It partners with AWS and SAP. Its offering aims to automate, integrate and digitise supply chains, the initial focus market being pharmaceuticals. BUYER’S GUIDE http://www.computerweekly.com https://searchdatabackup.techtarget.com/feature/Quorum-OnQ- 40 https://www.computerweekly.com/news/252465018/AWS-skills- collaboration-gives-rise-to-two-year-pre-university-cloud- qualification https://searchcloudcomputing.techtarget.com/essentialguide/A- Google-cloud-services-guide-for-the-enterprise https://searchcloudcomputing.techtarget.com/essentialguide/A- Google-cloud-services-guide-for-the-enterprise computerweekly.com 17-23 September 2019 20 Home
  • 13. News How IT departments can find different ways to upskill in the new economy Travel company Clarity bakes ThoughtSpot search and AI functions into analytics tool Digital factory approach signals a new departure for Network Rail’s IT strategy Editor’s comment Buyer’s guide to blockchain Delivering cloud in the financial services sector How 5G will transform your business Downtime Modum provides an IoT-type device with a data logger to be included with transported goods to monitor environmental con- ditions, such as temperature and humidity to prove compliance with good distribution practices. The data collected can be immutably secured in a blockchain
  • 14. and shared with stakeholders to add a layer of trust. Fraud prevention Tomia specialises in fraud prevention, traffic optimisation and roaming insights for mobile carriers. It provides real-time analyt- ics and recently announced a partnership with Microsoft, KPMG and R3 to provide a blockchain-based system to optimise dispute management and help resolve billing and settlement disputes. Quant Network’s Overledger is a blockchain operating sys- tem providing the ability for applications to interact with mul- tiple blockchains. The need for many-to-many relationships between applications and databases is not new: it was one that had to be addressed in the 1980s and 1990s with the rising use of relational databases. Standards were introduced and the market consolidated. This is what will happen in the world of blockchains. Furthermore, blockchain is not a panacea: it will never suit many applications where central control, extremely high speed or the mass storage of unstructured data are required. Blockchain merely provides another choice in the range of database options available. n SA SH K IN /A D
  • 15. O B E BUYER’S GUIDE http://www.computerweekly.com https://www.computerweekly.com/news/252439708/No- business-safe-from-cyber-attack-says-KPMG Copyright of Computer Weekly is the property of TechTarget, Inc. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. Annotated Reading Assignment Format: Title Author – Provide some source information for each entry. The obvious info provided could be the title of the source and the author. Present the title of articles in quotes, “On Education”, and longer works (books, documentaries) in italics, Super Size Me. Thesis or Main Point (1 to 2 sentences– Identify the main point of the article. This may be done by identifying and restating a specific sentence of two that you think represents the thesis. Sometimes a thesis isn’t directly stated. After reading a text, the thesis can be “identified” by contemplating what you think the
  • 16. author’s main purpose was in writing the essay and creating your own statement of it. Supporting Ideas (list of 4-6 items)– After identifying the main point (thesis), it is then important to list ideas from the text that support it. You can present support points as a list. These will be specific ideas or examples from the text that help “prove” the thesis. My Reaction (short paragraph, 5-7 sentences) – In a typical English or Literature course, your reaction to the events and ideas presented in a text serve as the foundation of class discussion and for essays. Practice reacting to the readings by expressing what you thought about the text. Did you like/dislike it? Why? Do you agree or disagree with ideas being presented? Why? Work on identifying specific points from a text that you think are strong/weak and be able to explain why you feel this way. Questions I Have (list, ~3) – Anything from a reading that is unclear to you should be listed here. It is very important that you become comfortable identifying things that don’t make sense and then addressing them with your teachers. Keep in mind that even the most talented readers or students will find things in a text that will cause them confusion and will require further clarification. Title: Authors: Source:
  • 17. Document Type: Subject Terms: Abstract: Author Affiliations: Full Text Word Count: ISSN: Accession Number: Database: Record: 1 Blockchain beyond the hype: What is the strategic business value? Carson, Brant Romanelli, Giulio Walsh, Patricia Zhumaev, Askhat McKinsey Quarterly. 2018, Issue 4, p118-127. 10p. 1 Color Photograph, 1 Diagram. Article *BLOCKCHAINS *DECENTRALIZATION in management *TRANSPARENCY in organizations *BUSINESS models *COST control
  • 18. *STRATEGIC planning The authors discuss their study on the strategic business value of blockchain to major industries. They described a structured approach that companies can follow to examine blockchain strategies. The core advantages of blockchain are decentralization, cryptographic security, transparency, and immutability. It is said that the value of blockchain will shift from driving cost reduction to enabling entirely new business models and revenue streams. Partner, McKinsey's Sydney office Associate partner, Melbourne office Consultant, Melbourne office. 2881 0047-5394 133693412 Business Source Premier Blockchain beyond the hype: What is the strategic business value? Blockchain can generate meaningful value for many companies. The key is figuring out what strategy makes sense, given your customers' pain points and your company's market position Blockchain is all the rage. Bitcoin-the first and most infamous application of the technology-has grabbed headlines for its rocketing price and volatility. Predictions such as the World Economic
  • 19. 1 2 3 3 1 2 3 Page 1 of 8UC MegaSearch 10/26/2019http://eds.a.ebscohost.com/eds/delivery?sid=8dc2267 5-4fdf-488e-afce-023afbccdded%40... Forum survey suggesting that 10 percent of global GDP will be stored on blockchain by 2027 have inspired government task forces, breathless press reports, and a multitude of conversations at Davos and in corporate conference rooms.[ 1] Tellingly, large investments are being made. Last year, venture capitalists put more than $1 billion into blockchain start-ups.[ 2] Initial coin offerings (ICOs), the blockchain-backed sale of cryptocurrency tokens in a new venture, raised $5 billion in 2017. Leading technology players are putting money and people into blockchain: IBM has invested $200 million and more than 1,000 employees in the blockchain-powered Internet of Things (IoT).[
  • 20. 3] Yet the fact remains that blockchain is an immature technology with a nascent market and no clear recipe for success. No wonder many corporate leaders are asking themselves a lot of questions. Is blockchain a disruptive threat? Is it a fad? Most importantly, can blockchain have strategic value for my company? To help answer these questions, we embarked on an industry- by-industry analysis of existing blockchain strategies, interviewing a range of experts including the executives overseeing these efforts at a number of companies. We evaluated the strategic importance of blockchain to major industries and identified who can capture what type of value through what type of approach. Our research led us to three key insights on the strategic value of blockchain: • Blockchain does not have to be a disintermediator to generate value. • Blockchain's short-term value will be predominantly in reducing cost. • Commercially viable blockchain solutions deployed at scale are three to five years away for most companies. In this article, we'll explain how we arrived at these insights and we'll describe a structured approach companies can follow to evaluate blockchain strategies. Some organizations may discover ways to extract value from blockchain in the short term. Dominant
  • 21. companies may discover even more: if they are willing to invest now to establish their blockchains as market solutions, they can cement their leadership and forestall the incursion of disruptive digital natives. WHAT IS BLOCKCHAIN? Blockchain is not synonymous with Bitcoin, which is just one cryptocurrency application that uses it. Blockchain is a distributed ledger, or database, shared across a public or private computing network. Each computer node in the network holds a copy of the ledger, so there is no single point of failure. Every piece of information is mathematically encrypted and added as a new "block" to the chain of historical records. Various consensus protocols are used to validate a new block with other participants before it can be added to the chain. This prevents fraud or double spending without requiring a central authority. The ledger can also be programmed with "smart contracts," a set of Page 2 of 8UC MegaSearch 10/26/2019http://eds.a.ebscohost.com/eds/delivery?sid=8dc2267 5-4fdf-488e-afce-023afbccdded%40... conditions recorded on the blockchain, so that transactions automatically trigger when the conditions are met. For example, smart contracts could be used to automate insurance-claim payouts. Blockchain's core advantages are decentralization, cryptographic security, transparency, and
  • 22. immutability. It allows information to be verified and value to be exchanged without having to rely on a third-party authority. 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. Indeed, our research focused on more than 90 discrete use cases of varying maturity for blockchain across industries. To clarify this variety of applications, we structured use cases into six categories across blockchain's two fundamental functions: record keeping and transacting. Some industries have applications across multiple categories, while others concentrate on one or two. Blockchain's disruptive potential lies partly in its technology, which eliminates the need for an entity to be in charge of managing, storing, and funding a database. A public blockchain, such as Bitcoin, has no central authority. This peer-to-peer model can become commercially viable due to blockchain's ability to compensate participants' contributions with "tokens" (application-specific cryptoassets), as well as with a stake in any future increases in the value. As a result, public blockchains can foster total disruptive disintermediation. However, as we explain in the following section, smart incumbent companies willing to engage with blockchain now can use the technology to prevent disintermediation. THREE BLOCKCHAIN TRUTHS TO HELP SHAPE YOUR STRATEGY Incumbents looking to defend against disintermediation-or to go on the offensive themselves-should start by understanding three key insights.
  • 23. 'Permissioned' blockchains generate value and ward off disintermediation The commercial model that is most likely to succeed in the short term is a different kind of blockchain, a "permissioned" one, with controlled access and editing rights (exhibit). In this model, participants can benefit from securely sharing data while automating control of what is shared, with whom, and when. Equipped with meaningful transparency and fraud controls, these permissioned blockchains help existing companies reduce the complexity and cost of multiparty transactions. It's a way for incumbents to harness blockchain rather than be overtaken by it. Dominant players can maintain their positions as central authorities or join forces with other industry players to capture and share value. Permissioned blockchains allow companies to develop distinctive value propositions in commercial confidence, with small-scale experimentation preceding scaled executions. At the Australian Securities Exchange, for example, a blockchain system is being deployed for equities clearing to reduce back-office reconciliation work for its member brokers.[ 4] IBM and Maersk Line, the world's largest shipping company, are working together to create a blockchain platform that would provide traders with a secure, real-time exchange of supply-chain data and paperwork.[ 5] Page 3 of 8UC MegaSearch 10/26/2019http://eds.a.ebscohost.com/eds/delivery?sid=8dc2267 5-4fdf-488e-afce-023afbccdded%40...
  • 24. The potential for blockchain to become a new open-standard protocol for use cases such as trusted records, identity, and transactions offers incumbents a powerful safeguard against disintermediation. Industry players greatly reduce the aperture for radical new entrants by learning to extract value from blockchain, especially if that value benefits customers. The degree to which incumbents adapt and integrate blockchain technology will determine its disruptive force in their industry. In the short term, blockchain's strategic value is mainly in cost reduction Initially, blockchain will drive operational efficiencies. It takes cost out of existing processes by removing intermediaries and rationalizing administrative processes such as record keeping and transaction reconciliation. In the cases we analyzed, approximately 70 percent of the value at stake in the short term was in cost reduction. Certain industries' fundamental functions are inherently more suited to blockchain solutions. The core functions of financial-services firms, for example, such as verifying and transferring financial information and assets, align closely with blockchain's core transformative impact. This explains why approximately 90 percent of major Australian, European, and North American banks are already experimenting or investing in blockchain. Governments, too, can reap considerable savings by putting key record-keeping and verifying functions onto blockchain infrastructure. From birth
  • 25. certificates to taxes, blockchain-based records and smart contracts can simplify interactions with citizens and increase data security. More than 25 governments are actively running blockchain pilots supported by start-ups. In healthcare, blockchain applications could unlock the value of data availability and exchange for providers, patients, insurers, and researchers. Blockchain-based healthcare records can improve administrative efficiency and give researchers access to the historical, patient-identity-protected data sets crucial for advancements in medical research. Significant, scaled commercial applications are likely three to five years away Over time, the value of blockchain will shift from driving cost reduction to enabling entirely new business models and revenue streams. One promising use case is the creation of a distributed, secure digital identity. This could be helpful for individuals and lucrative for companies, which could customize services to people who grant them access in ways we can't imagine now. But these kinds of new businesses are more of a long-term possibility than a nearterm reality. Why? Because time is needed for four key factors to mature: standards and regulations, technology, asset digitization, and ecosystem. Common standards must be developed. The lack of common standards and clear regulations can be a major limitation on the scalability of blockchain applications. When cooperation between multiple players is necessary, establishing such standards is as complex as it is critical. Industry consortia, such as the 70-bank group that collaborated to
  • 26. develop the financial-grade open-source Corda blockchain platform, will be needed to establish common standards. That kind of work is time- consuming. Page 4 of 8UC MegaSearch 10/26/2019http://eds.a.ebscohost.com/eds/delivery?sid=8dc2267 5-4fdf-488e-afce-023afbccdded%40... Thankfully, regulators are generally engaged rather than opposed or unaware. The US Securities and Exchange Commission, for example, is bringing ICOs under the agency's regulation and into the mainstream.[ 6] Technology must advance. The immaturity of blockchain technology is a major concern for companies today. Organizations need a trusted enterprise solution, particularly because they may not realize the cost benefits of blockchain until their old systems are decommissioned. Currently, few startups have sufficient credibility, technology stability, or industry expertise for government or industry deployment at scale. Major technology players are positioning themselves to address this gap with blockchain-as-a-service (BaaS) offerings in a model similar to cloud-based storage. Assets must be digitally connected. Assets such as equities, which are digitally recorded and transacted, can be simply managed end to end on a blockchain system or integrated through application programming interfaces (APIs) with existing
  • 27. systems. However, connecting and securing physical goods to a blockchain requires enabling technologies like IoT and biometrics. This connection can be a vulnerability in the security of a blockchain ledger.[ 7] While the blockchain record might be immutable, the physical item or IoT sensor can be tampered with. Certifying the chain of custody of commodities such as grain or milk, for example, would require a tagging system like radio-frequency identification, which could increase assurance even if it couldn't deliver absolute provenance. The coopetition paradox must be resolved. Blockchains become more valuable with more participants, but they also become more complex to coordinate. For example, a blockchain solution for digital media, licenses, and royalty payments requires massive coordination among producers and consumers of digital content. Resolving this paradox of natural competitors having to cooperate is the toughest of these four factors. The issue is not identifying the network-or even getting initial buy-in-but agreeing on the governance decisions around how the system, data, and investment will be led and managed. The strategic incentives of the players must be aligned, a task that can be particularly difficult in highly fragmented markets. Overcoming this issue often requires a sponsor, such as a regulator or industry body, to take the lead. A STRUCTURED WAY TO DEVELOP BLOCKCHAIN STRATEGY Fear of missing out on a new technology sometimes leads companies to develop solutions to problems that don't exist. We believe companies can avoid this
  • 28. trap through a structured approach to blockchain. First, identify and skeptically assess a specific use case that can create value. Most companies can find use cases by taking a close look at the pain points affecting their industry and their customers. Companies can decide whether these cases are feasible by considering a variety of factors, such as its capability to design a blockchain solution, technology and asset constraints, and the potential for passing on benefits and savings to customers. If a use case does not meet a minimum level of Page 5 of 8UC MegaSearch 10/26/2019http://eds.a.ebscohost.com/eds/delivery?sid=8dc2267 5-4fdf-488e-afce-023afbccdded%40... feasibility and potential return, then companies should avoid launching a project just to "be in the game." Companies that have identified a promising use case, however, will move on to the second part of our structured approach: understanding how their market position will impact that target use case. Part of blockchain's value comes from its network effects and interoperability, and all parties need to agree on a common standard to realize this value- multiple siloed blockchains provide little advantage over multiple siloed databases. As the technology develops, a market standard will
  • 29. emerge and investments into the nondominant standard will be wasted. Coordination with other industry players is critical. That's why a company's market dominance, or lack thereof, affects its ability to influence other key players in the industry and to help shape standardization and regulatory barriers. Here's how market position shapes blockchain strategy. Leaders: Build on existing strengths Leaders are dominant players in industries with few requirements for coordination and regulatory approval. These companies should pursue use cases now. They have the potential to create solutions that can solidify their market position and set industry standards. The greatest risk for these companies is inaction, which could open a competitive window for disruptors. Change Healthcare is an example of a company taking advantage of its market leadership. One of the largest independent healthcare IT companies in the United States, it launched an enterprise- scale healthcare blockchain for claims processing and payment.[ 8] Conveners: Shape standards to gain an edge Conveners are dominant players who cannot single-handedly direct blockchain adoption, since they operate in industries with considerable regulatory and standardization barriers. Conveners need to drive the conversations and consortia that will shape the new standards poised to disrupt their current businesses. Then they can position themselves to shape and capture the value of new blockchain standards.
  • 30. Convening tactics should be deployed for high-value use cases, such as trade finance, that cannot be realized without a broadly shared set of standards. An example of a convener following this strategy is Toyota, whose Research Institute set up the Blockchain Mobility Consortium with four global partners to focus on blockchain solutions for critical accelerators of autonomous vehicles: data sharing, peer-to-peer transaction, and usagebased insurance.[ 9] Followers: Stay informed and be ready to move fast Most companies are followers, in the sense that they lack the power to influence all necessary parties, especially when applications of blockchain require high standardization or regulatory approval. But followers cannot afford to ignore blockchain. They must be informed about market innovations, keeping a close watch on blockchain developments. They should also be prepared to move fast to adopt emerging standards. Just as businesses have developed risk and legal Page 6 of 8UC MegaSearch 10/26/2019http://eds.a.ebscohost.com/eds/delivery?sid=8dc2267 5-4fdf-488e-afce-023afbccdded%40... frameworks for adopting cloudbased services, companies should focus on developing a strategy for how they will implement and deploy blockchain technology. Followership is risky, given the ability of dominant players to establish private-permissioned
  • 31. networks. A follower, no matter how fast, may find itself locked out of the exclusive club that establishes the initial proof of concept. Companies can mitigate this risk by joining select existing and emerging consortia early. The short-term investment costs of membership are often outweighed by the long-term costs of getting left behind. Attackers: Leverage their market leadership Attackers are often new market entrants without an existing market share to protect, armed with disruptive or transformative business models and blockchain solutions. Attackers offer a service intended to disintermediate existing players. Most peer-to-peer applications, from finance to insurance to property, fall into this category. A good example of an attacker is Australian start-up Power Ledger, a peer-to-peer marketplace for renewable energy that raised 34 million Australian dollars through its ICO.[10] Sometimes, companies pursuing an attacker strategy will try to partner with a dominant company in the market to leverage their leadership influence. Incumbents can deploy an attacker's blockchain strategy in a separate, noncore digital business. Blockchain-as-a-service (BaaS) providers, for example, often adopt an attack strategy when they try to sell services into industries where they currently do not participate. Blockchain has strategic value for many companies. In the short term, the technology can reduce costs without disintermediation, and in the long run it can create new business models. Existing digital infrastructure and the growth of BaaS offerings have
  • 32. lowered the costs of experimentation. However, a variety of fundamental factors limit the scalability of many use cases and extend the amount of time needed for return on investment on proof of concepts. Assessing these factors with pragmatic skepticism about the scale of impact and speed to market will help reveal the correct strategic approach on where and how companies can extract value in the short term. Dominant players, however, have an enormous opportunity to establish their blockchain as the market solution. They should be making those moves now. 1 Deep shift: Technology tipping points and societal impact, World Economic Forum, September 2015, weforum.org. 2" Blockchain startups absorbed 5X more capital via ICOs than equity financings in 2017," CB Insights, January 2018, cbinsights.com. 3 " IBM invests to lead global Internet of Things market-shows accelerated client adoption," IBM, October 2016, ibm.com. 4"ASX selects distributed ledger technology to replace CHESS," ASX, December 2017. Page 7 of 8UC MegaSearch 10/26/2019http://eds.a.ebscohost.com/eds/delivery?sid=8dc2267 5-4fdf-488e-afce-023afbccdded%40...
  • 33. 5" Maersk and IBM to form joint venture applying blockchain to improve global trade and digitize supply chains," IBM, January 2018, ibm.com. 6 Jay Clayton, "Statement on cryptocurrencies and initial coin offerings," U.S. Securities and Exchange Commission, December 2017, sec.gov. 7 To be sure, blockchain does not eliminate the possibility of fraudulent data being written to the database, which could in turn be used to substantiate the existence of fraudulent assets. 8 "Change Healthcare announces general availability of first enterprise-scale blockchain solution for healthcare," Change Healthcare, January 2018, changehealthcare.com. 9 "Toyota Research Institute explores blockchain technology for development of new mobility ecosystem," Toyota, May 2017, toyota.com. "Power Ledger token generation event closes with A$34million raised," Power Ledger, October 2017, web.powerledger.io. DIAGRAM: Exhibit. Private, permissioned blockchain architecture offers a way to optimize network openness and scalability. Blockchain-architecture options PHOTO (COLOR) ~~~~~~~~ By Brant Carson; Giulio Romanelli; Patricia Walsh and Askhat Zhumaev
  • 34. Copyright of McKinsey Quarterly is the property of McKinsey & Company, Inc. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. Page 8 of 8UC MegaSearch 10/26/2019http://eds.a.ebscohost.com/eds/delivery?sid=8dc2267 5-4fdf-488e-afce-023afbccdded%40...