How to Justify a Blockchain Solution

Matthew Liotine, Ph.D.

Vice President, BLR Research

Blockchain is a technology concept that can find general purpose across many vertical industries, providing benefits by building upon existing business and operational models. Blockchain provides a social source of truth versus a single source of truth through a shared decentralized database model instead of a single centralized database system. It is a trust protocol built on elements of networking and cryptology that can be used to ensure trust without necessarily using an intermediary or central authority. In this respect, it can be used to create a reliable distributed digital ledger of record describing who owns what, and who transacts with what. It is predicated on the simple idea that if everyone witnesses, believes and agrees to something, then it is authentic and irrefutable. These features could generate enormous opportunities for innovating enterprise operations.

Blockchain can decrease transaction costs and create added transparency without the need of a centralized intermediary party or system, although in practice some form of an intermediary may be necessary. Used in conjunction with a distributed ledger, it provides a highly efficient way of synchronizing data across many parties such that they all see the same data. These features provide attractive opportunities for implementation within enterprise operations. While there are many pilots underway to explore these opportunities, it is common for many firms to take a wait and see approach prior to implementing blockchain related solutions within their own operations.

As with any new and innovative technology, a low risk approach is usually desirable. To this end, the following are some guidelines for pursuing a successful blockchain initiative. Each of these represent criteria for realizing blockchain benefits:

· Multipoint information exchange

Keeping information centralized across multiple participants should be weighed against the benefits of decentralization. Centralized databases are often used to support multi-point information exchange, versus point-to-point. If the operational and storage costs of centralizing data with shared write access is excessive, then blockchain could present an opportunity for replacing the centralized database with a distributed ledger. A blockchain protocol could provide the mechanisms to receive and distribute information across a network and keep that information synchronized so that everyone sees the same thing, thus serving as an internal reflection of trust. In turn, this would eliminate the costs of using middlemen or intermediaries to provide a centralized data service.

· Verification of transactions

Transaction integrity and security are extremely important within operations. A trusted third-party intermediary is traditionally required based on the assumption that trading partners might not know or trust one another or may have misaligned interests. Hence, an intermediary’s role is that of securing, curating, controlling and validating transactions across multiple participants. The cost of these services performed by the intermediary however can be excessive and should be weighed against the potential opportunity for providing the same functionalities using blockchain protocols in conjunction with a distributed ledger, instead of using the intermediary.

· Transaction maintenance

In a supply chain, which typically involves creating, reselling and moving items between various parties and locations, transaction history can be extremely valuable. Transactions generated from different parties who depend on each other will require a specific sequence or timing of events. If a significant number records must be maintained without being changed, re-ordered, or deleted, a blockchain based distributed ledger can provide a cost-effective alternative to centrally maintaining transaction records. Depending on the nature of the ledger, information can be made to be both transparent and publicly accessible.

· Single-use applications

Single-use applications should be considered as prime candidates for initial blockchain implementation. These are likely simple yet proven applications that are invisible to users and do not require changes in user behavior or processes. Blockchain utilized in conjunction with a distributed ledger and smart contract can be used to invoke low level functions such as existence or time stamping. It can also be embedded within ERP systems to support transactions such as a purchase order, sales order, goods issue or goods receipt. Procedures such as the three-way match, used for processing supplier invoices, could be carried implicitly within the blockchain protocol versus within the ERP system.

· Digital assets

Assets are constantly being exchanged. Using serialization, assets can be tokenized in a digital form such that they can be tracked by information systems. While this concept is not new, it begs the question of being able to economically track the exchange of large volumes of transactions involving those assets. Businesses that heavily rely on tracking digital assets may favor an alternative approach involving blockchain, which was purposely designed for handling tokenized assets.

Overall, proving in a blockchain solution approach can be challenging. There are two major applications for a sound blockchain business case. In both of these, the case should emphasize long term growth, more so than shorter term ROI:

Existing Process/System Improvement:

The challenge here is to prove that the price/performance characteristics of using a blockchain-based approach that is compliant with open industry protocols (e.g. Hyperledger, Ethereum, other) will provide higher ROI over the long term versus using a proprietary or tailored solution. A blockchain implementation could provide a foundation at both the process and system level to cost-effectively scale improvements, upgrades and new applications over time, versus swapping systems or technology at later times, thereby smoothing migration costs. The business case should focus on demonstrating benefits in an acute market or application. Once successful, it could pave the way for business cases related to more mass market applications.

New Process/System Implementation:

This might be a more suitable situation to successfully position a blockchain business case, since there would be no preceding or legacy solution in place for benchmarking. However, the challenge here is to prove that a solution built on an industry compliant blockchain platform, per the above, will be more cost-effective in the long run than using proprietary solutions.

BLR's consulting services and innovation approach can help your firm quickly wrestle the blockchain challenge. To learn more, visit BLR at www.blr-research.com.