Analyst Perspective on Blockchain
Why should businesses care about blockchain, particularly in today's environment?
During 2020, pandemic-induced disruptions drove home the need to increase process efficiency, improve supply chain visibility, and find new ways of collaborating, both internally and externally. Digitizing processes and paperwork go a long way to addressing these issues; adding a blockchain element unlocks even more value. Blockchain-based systems further increase efficiencies and savings through enabling the automation of multiparty workflows and processes, and allowing value chain participants to reinvent entire processes. Companies are also working on entirely new business and service models that wouldn’t be possible without blockchain technology.
In simple terms, what is blockchain and what can it do?
Forrester’s definition of blockchain (aka Distributed Ledger Technology or DLT) is “A software architecture that supports multiparty workflows around trusted data that may be shared and distributed across organizational (and potentially national) boundaries”. This architectural principle has been translated into reality in many different ways, but there are common features.
As to what a blockchain can do, there are still a few common misperceptions. So let’s clear those up:
- Blockchains can support time-stamping, notarization and certification; they’re also great at preserving data integrity. What the technology can’t do is ensure that the data that’s being notarized or captured is accurate and truthful. Data quality and veracity must be taken care of before that data gets anywhere near a blockchain.
- Blockchains can support the transfer of asset ownership (subject to legal agreement and applicable legislation or regulation). But the technology can’t ascertain the real-world legal ownership status – this has to be done off-chain.
- Blockchains can support track-and-trace of digital and physical assets, provide a provenance record or prove compliance with shipping conditions; and smart contracts are great for process automation. What the technology can’t do is define the processes and contractual agreements that you’re wanting to automate. It also can’t ensure the continued integrity of the physical goods as they move along the supply chain, and it can’t prevent tampering with source data (e.g. from a sensor); other technologies (both IT and non-IT) are needed for that.
For those things blockchain can do, where is it best applied and how can it benefit businesses and/or customers?
Not surprisingly, given the current environment, track-and-trace/proof of provenance continue to be key areas of investment, as are invoicing and inventory management. Through removing friction from multiparty workflows, these systems save cost and time. Being able to prove data provenance and integrity is another key use case; we’ll increasingly see blockchain-based systems used to demonstrate compliance with regulations regarding data source and data handling. Trustworthy data is also key to sustainability reporting; an added bonus is that many blockchain-based solutions (e.g. track-and-trace, or contract compliance in resource extraction) already have this data.
Credentials sharing and verification have moved into the limelight more recently, as businesses and governments work on finding ways to allow individuals to prove their health or vaccination status, while also preserving personal privacy.
On the more strategic side, the tokenization of assets is receiving increased attention. Those assets could be digital (e.g. an artwork), physical (e.g. a building, heavy machinery, a race horse) or an artefact like an invoice or a bill of lading. For some, the key objective is making an asset more easily tradeable. For many, that’s not the key focus today: They look to reap the benefits of increased efficiency and reduced fraud that asset tokenization can bring to a process.
While there are key business benefits to adopting blockchain, why do some projects fail? What are the pitfalls to avoid?
- Expecting too much from the technology. If the data is bad, the process is broken, or there’s a market structure issue, technology on its own can’t fix that.
- Not having a clear objective for the project. It’s true that you often don’t understand the full potential of technology until you’ve tried it. But you still need to start with a clear understanding of what problem you’re trying to solve, or which new idea you want to support.
- Working on the blockchain element in isolation. Projects that don’t consider right from the start how the blockchain piece fits into the end-to-end process, which existing systems it’ll need to integrate with, and which supplementary technologies may be needed, are bound to fail.
- Involving security, risk and compliance too late in the process. “We’ll take care of that later” isn’t an option with blockchain projects. In the best case, the project will be delayed at a later stage (and for longer than it would have done otherwise); in the worst case, firms have had to throw everything they already developed because of a key deficiency.
- Failing to consider the benefits for other ecosystem participants. Blockchains are a team sport; and while dominant firms can dictate terms, they won’t get full participation (and hence maximum benefit) from others in the value chain if those firms can’t see what’s in it for them.
Now that we understand the dos and don’ts, how can businesses get started successfully?
To reap the maximum strategic gain from blockchain, think big, but start small. Your ultimate goal may be to completely revamp all your industry’s supply chain processes. But you won’t get buy-in for that. Starting with a project that can go from pilot project to production quickly, and which makes an existing process more efficient, will result in a win/win situation: Tangible business benefits will make it easier to get more funding; and as decision-makers get more comfortable with the technology, they’ll start championing the initiative, and may even come along with new ideas.
Another key success factor is understanding that blockchain projects are 80% business; and of that remaining 20%, the blockchain piece is only one feature in a bigger technology landscape. That’s why, ideally, we’d stop talking about “blockchain projects” – the focus should be on the solution.
To maximize your chances of project success:
- Focus on the outcome: What are you trying to achieve?
- Be able to articulate quantifiable benefits.
- If you need to bring ecosystem partners on board, make sure there’s something in it for everybody.
- Consult with your colleagues from Risk, Compliance and Security right from the beginning.
- Don’t position your initiative as a “blockchain project.” If possible, don’t even talk about blockchain or DLT — focus on benefits and problems solved.
- The overall solution will typically involve elements other than blockchain. Consider these early:
- Integration with existing systems.
- Other technologies, e.g., IoT, geospatial systems, advanced analytics, and AI.
- Non-IT technologies.
About Martha Bennett
Martha serves CIOs and other tech leaders, helping them understand the impact of emerging technologies on their business. She also provides best practice guidance on how to assess and introduce new and emerging technologies. Martha provides in-depth coverage of blockchain technology and digital assets, aswell as analytics and artificial intelligence at a strategic level. She has also started a new research stream, looking at types of non-IT innovation that are necessary to get the most out of new and emerging technologies.