Since the surge in blockchain technology over the last five-plus years, classic blockchain features have been touted for very specific purposes; data distribution, decentralised governance, digital asset tokenisation and smarter contracts. However, as organisations struggle to develop business cases for blockchain-enabled solutions at scale, classic blockchain features are being implemented as silver bullets in attempts to solve business problems by executive and IT leaders focused on digital transformation.
Still, in a market led by blockchain consultancies and start-ups, a push to move beyond pseudo-anarchic cryptocurrency origins to more centrally controlled business-oriented models, has encouraged pragmatism to employ blockchain. As organisations look to develop business cases for blockchain-enabled solutions at scale, executive and IT leaders must consider the lessons learned throughout deployment, identifying where success is less likely.
Business data and message storage and exchange are required by any multilateral business conducted through a blockchain. But a blockchain shared ledger should not be mistaken for a fully functional distributed database, limited in its design, and not intended for that purpose.
Replicating large files such as invoice records or even complex contract records across dozens or even hundreds of servers in a blockchain ecosystem makes little sense, with transaction synchronisation times dramatically increasing. But equally importantly, the required storage and networking will likely strain IT budgets, despite the use of cloud services. Executive and IT leaders should:
• Ignore blockchain cost-saving and efficiency promises, since networking and storage costs are likely to increase, and instead focus on blockchain’s potential to drive more data standardisation across multiple players.
• Consider blockchain as a tool to mitigate data fragmentation with other parties, but it will not diminish or simplify the overall data management requirements of organisations.
• Separate blockchain supplier discussions, distinguishing between data distribution and data sharing consistency.
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The intended benefits of blockchain having no central authority or governance have often been praised by supporters and experts. However, the reality is that most ecosystem owners, such as Amazon or American Express will unlikely yield or share control of their networks to all or even some participants. It’s expected that most public blockchains will begin to evolve away from this philosophy due to coordination and complexity and proprietary interests. As a result, executive and IT leaders should:
• Put governance in place at the start of any blockchain initiative to determine whether rules will be enforced separately or will be self-enforcing in the blockchain. Most likely, the governance enforcing blockchain rules will be handled off-chain instead of as self-enforcing rules in the blockchain.
• Recognise that blockchain decentralisation is not a silver bullet to eliminate intermediation and will generally not be in the commercial interests of ecosystem leaders.
• Use decentralisation as a design principle for finding new ways of cooperating and sharing among different parties, not necessarily as a tool for eliminating intermediation.
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Digital Asset Tokenisation
While blockchain can handle the metadata representing digital assets – similar to that of public blockchains – there are still key impediments for private/permissioned blockchain to become an alternative to existing technologies that address the custody and the value exchange services for a given asset class.
Public blockchains can digitally represent asset value in many forms, including money, time, utility, services, among others. The ability to digitally represent and exchange value on top of a public blockchain is what we call global liquidity democratisation. This new way of globally accessing liquidity is what’s making organisations examine digital asset tokenisation as a new business opportunity, often referred to as ‘tokenomics’. This new global access is enabling decentralised financing and investment alternatives, and with mass participation and a decline in transaction fees, it will provide more frictionless banking and payment services. In response, executive and IT leaders should:
• Conduct proof of concept in a private/permissioned domain by simulating a public blockchain environment, and conduct proof of concept for liquid, illiquid and nonfungible assets.
• Use current custody and value exchange requirements in terms of liability management to lower expectations on blockchain’s magical bullet approach to eliminate well-established intermediaries in the asset management value chain.
Whilst in theory, smarter contracts on private permissioned blockchains could enable more efficient ways for managing business processes, legal contracts and supporting programmable tokens, the reality is blockchained smart contracts may also diminish the required middlemen, such as lawyers.
The hype surrounding smart contracts is often due to the diminished role of attorneys in drafting agreements and negotiating disputes, however lawyers will continue to be involved in this process to ensure the legal language protects their clients. Blockchain-supported contracts will have almost no impact on this attorney role.
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This contract evolution is already occurring through blockchain consortia in the payments, trade, and supply chain finance spaces. Blockchain technology has been the catalyst for discussing new and better cooperation among partners and competing actors. The technology improves the ability to engage noncompeting participants in broader digital ecosystems value exchange.
Nevertheless, organisations looking to streamline business processes or manage legal contracts are currently solving these problems using traditional technologies, with only 10% being handled on-chain in a private permissioned environment. Smart contracts on a blockchain will enable some agreement efficiency and optimisation across contractual participants, however, this is a long way from the touted idea of radically transforming legal documents, lawyers’ critical role and current business models. Executive and IT leaders focused on digital business transformation should:
• Lower business expectations when using private permissioned blockchain for standardising and improving contract management by acknowledging that blockchain-inspired smart contracts will have minimal impact on reducing contractual disputes or the roles of lawyers in resolving them (and in resulting fees).
• Refocus business leaders on smarter contracts in the public blockchain domain mainly for notarisation and tokenisation use cases.