Do Companies Actually Need Blockchain?
Blockchain Technology is the talk of the town these days and integrating the tech into your business can be advantageous. However, enterprises should weigh their options wisely. The technology can drastically help reduce cost, increase revenue and eliminate the need of a middle-man. But as it is still relatively new and untested, blockchain’s benefits come at the expense of speed of transaction. For now.. 😉
Let us take a look at several conditions that can help you decide whether blockchain technology is truly needed in your business.
The hype, speculative new assets such as Cryptocurrencies and alternative fundraising means like ICOs, surrounding ‘Blockchain’ has exaggerated the realistic capabilities and applications of this new technology. Businesses, developers, and investors have yet to identify the right applications that are appropriate for distributed ledger technology.
Databases have been used for decades to persist state and query data. Decades worth of research has been invested to optimize the different layers of query processing.
- Naturally, they have the highest performance in terms of transaction throughput and query latency.
- However, all along, they have been designed to be centrally managed by a single authority. Hence, no consensus mechanism is required across different parties.
- Furthermore, centralizes services, servers, datacenter are prone to cyber-attacks
Permissionless Blockchains are public ledgers that are not managed by a centralized authority. That is, the ledger is distributed across a dynamic network of peers.
- The brilliance of Satoshi, was to present a design that maintains consensus on the distributed state in a dynamic and trustless network. This means that permissionless Blockchains can tolerate a (fraction of the) network with Byzantine or untrusted behavior.
- As everything comes with a price, the tradeoff here is performance cost (throughput and latency). In Bitcoin, the drastic performance hit is because of the POW protocol itself which by design is slow. In comparison to normal databases, in any permissionless Blockchain, a performance hit is inevitable. Because no matter what, to maintain the consistency of the distributed state, there has to be communication between the different peers in the (geographically distributed) network.
Permissioned Blockchains represent a hybrid design. They are not centralized to a single entity, yet they are authorized to a small set of preselected trusted peers that can write state.
- Since the database network is not scaled to a large number of public nodes, as in the case for permissionless Blockchains, its performance in terms of throughput and latency is much better.
- Nonetheless, its performance cannot compete with a centralized database.
After looking at these different systems, it is easy to realize that there is no one-size-fits-all solution. Everything is a trade-off. Different applications have different requirements and hence different appropriate solutions.
The sole distinction between public and private blockchain is related to who is allowed to participate in the network, execute the consensus protocol and maintain the shared ledger.
A public blockchain network is completely open and anyone can join and participate in the network. The network typically has an incentivizing mechanism to encourage more participants to join the network. Bitcoin is one of the largest public blockchain networks in production today. One of the drawbacks of a public blockchain is the substantial amount of computational power that is necessary to maintain a distributed ledger at a large scale. Another disadvantage is the openness of public blockchain, which implies little to no privacy for transactions and only supports a weak notion of security.
A private blockchain network requires an invitation and must be validated by either the network starter or by a set of rules put in place by the network starter. Businesses who set up a private blockchain will generally set up a permissioned network. This places restrictions on who is allowed to participate in the network, and only in certain transactions.
Whether to adopt blockchain is not merely a technological decision; it is also a business decision. Great use cases solve real problems at a cost that is significantly lower than the benefits the adoption brings. Blockchain’s unique properties, meaning that a new analytical framework is useful, in part because of the fact that blockchain has emerged at a unique point in society’s technological development. While the application of technology to improve business processes is nothing new, previous generations of technology were predominantly about the faster and more secure exchange of information. Blockchain, meanwhile, is about the exchange of value; it is intended to enable individuals to exchange currency and other assets with one another without relying on a third party to manage the transactions. It also implies the dramatic redefinition of the business processes associated within and between companies.
Blockchain might have the disruptive potential to be the basis of new operating models, but its initial impact will be to drive operational efficiencies. Cost can be taken out of existing processes by removing intermediaries or the administrative effort of record keeping and transaction reconciliation. This can shift the flow of value by capturing lost revenues and creating new revenues for blockchain-service providers. Based on a McKinsey survey, “approximately 70 percent of the value at stake in the short term is in cost reduction, followed by revenue generation and capital relief”
Cryptocurrency’s core advantages are low-fee transferability, ability to transact cross-borders and deflationary character in case of value appreciation/ storage. Blockchain’s main 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.
Optimize blockchain strategy based on market position. Identified promising use cases, develop strategies and design choices to shape a viable solution.
Industry leader should act now to maintain their market positions and take advantage of the opportunity to set industry standards. As dominant players pursuing use cases with fewer requirements for coordination and regulatory approval, they can establish market solutions.
Moonwhale: Value Chain Optimization, Efficiency Improvement
Moonwhale: Financing Your Expansion, Tokenising Assets
Sources: CB Insights, Do you need a blockchain?, World Economic Forum, McKinsey&Company, IBM
I hope you enjoy this article! Please leave any feedback below. Let’s wish for a better 2019. :)
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Iliya Zaki is the Marketing and Community Manager for Moonwhale Ventures.
Moonwhale Ventures is a Consultancy for Blockchain Applications in Corporations, SMEs or Listed Companies to improve the efficiency of the value chain, and new innovative ways to funding business expansion through STO, ICCO (tokenization).