Blockchain Technologies and Cryptocurrencies: What You Need to Know to Serve Your Clients
In Brief
The Hype
We've all heard that blockchain will revolutionize concern, but it'southward going to take a lot longer than many people claim.
The Reason
Like TCP/IP (on which the net was congenital), blockchain is a foundational technology that will require broad coordination. The level of complexity—technological, regulatory, and social—will be unprecedented.
The Truth
The adoption of TCP/IP suggests blockchain will follow a adequately predictable path. While the journeying will have years, information technology'due south not too early for businesses to showtime planning.
Contracts, transactions, and the records of them are amidst the defining structures in our economical, legal, and political systems. They protect assets and ready organizational boundaries. They establish and verify identities and chronicle events. They govern interactions amidst nations, organizations, communities, and individuals. They guide managerial and social action. And yet these disquisitional tools and the bureaucracies formed to manage them have non kept up with the economy's digital transformation. They're like a rush-60 minutes gridlock trapping a Formula one race car. In a digital world, the way nosotros regulate and maintain administrative command has to change.
Blockchain promises to solve this problem. The technology at the heart of bitcoin and other virtual currencies, blockchain is an open, distributed ledger that tin record transactions betwixt two parties efficiently and in a verifiable and permanent mode. The ledger itself can as well be programmed to trigger transactions automatically. (Encounter the sidebar "How Blockchain Works.")
With blockchain, we can imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision. In this world every understanding, every process, every task, and every payment would take a digital record and signature that could exist identified, validated, stored, and shared. Intermediaries like lawyers, brokers, and bankers might no longer be necessary. Individuals, organizations, machines, and algorithms would freely transact and interact with one some other with little friction. This is the immense potential of blockchain.
Indeed, about anybody has heard the claim that blockchain volition revolutionize business concern and redefine companies and economies. Although we share the enthusiasm for its potential, we worry about the hype. It's not only security issues (such every bit the 2022 plummet of one bitcoin substitution and the more recent hacks of others) that business organisation the states. Our experience studying technological innovation tells us that if there'southward to be a blockchain revolution, many barriers—technological, governance, organizational, and even societal—will take to fall. Information technology would exist a mistake to blitz headlong into blockchain innovation without understanding how it is likely to have hold.
True blockchain-led transformation of business and regime, nosotros believe, is still many years away. That'south because blockchain is non a "disruptive" technology, which tin can attack a traditional business model with a lower-toll solution and overtake incumbent firms speedily. Blockchain is a foundational technology: It has the potential to create new foundations for our economic and social systems. But while the impact will exist enormous, it will take decades for blockchain to seep into our economical and social infrastructure. The procedure of adoption will be gradual and steady, not sudden, as waves of technological and institutional change proceeds momentum. That insight and its strategic implications are what we'll explore in this article.
Patterns of Technology Adoption
Earlier jumping into blockchain strategy and investment, allow's reflect on what we know about technology adoption and, in item, the transformation procedure typical of other foundational technologies. One of the most relevant examples is distributed calculator networking engineering science, seen in the adoption of TCP/IP (manual control protocol/net protocol), which laid the background for the development of the internet.
Introduced in 1972, TCP/IP first gained traction in a single-use case: as the ground for e-post amongst the researchers on ARPAnet, the U.S. Department of Defense forerunner to the commercial net. Before TCP/IP, telecommunications compages was based on "circuit switching," in which connections between ii parties or machines had to be preestablished and sustained throughout an exchange. To ensure that any 2 nodes could communicate, telecom service providers and equipment manufacturers had invested billions in building defended lines.
TCP/IP turned that model on its caput. The new protocol transmitted information by digitizing it and breaking information technology upwards into very small packets, each including address information. Once released into the network, the packets could take whatever route to the recipient. Smart sending and receiving nodes at the network's edges could detach and reassemble the packets and interpret the encoded data. There was no need for defended private lines or massive infrastructure. TCP/IP created an open up, shared public network without any cardinal authorisation or party responsible for its maintenance and improvement.
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Traditional telecommunications and computing sectors looked on TCP/IP with skepticism. Few imagined that robust data, messaging, voice, and video connections could be established on the new compages or that the associated organisation could be secure and scale up. But during the tardily 1980s and 1990s, a growing number of firms, such as Sun, NeXT, Hewlett-Packard, and Silicon Graphics, used TCP/IP, in function to create localized individual networks inside organizations. To do so, they developed building blocks and tools that broadened its use beyond due east-postal service, gradually replacing more-traditional local network technologies and standards. As organizations adopted these edifice blocks and tools, they saw dramatic gains in productivity.
TCP/IP burst into broad public utilize with the advent of the Www in the mid-1990s. New technology companies quickly emerged to provide the "plumbing"—the hardware, software, and services needed to connect to the now-public network and exchange information. Netscape commercialized browsers, web servers, and other tools and components that aided the development and adoption of internet services and applications. Sun collection the development of Java, the awarding-programming language. As information on the web grew exponentially, Infoseek, Excite, AltaVista, and Yahoo were built-in to guide users effectually it.
In one case this basic infrastructure gained critical mass, a new generation of companies took advantage of low-cost connectivity by creating internet services that were compelling substitutes for existing businesses. CNET moved news online. Amazon offered more books for auction than whatsoever bookshop. Priceline and Expedia made it easier to buy airline tickets and brought unprecedented transparency to the process. The ability of these newcomers to get all-encompassing reach at relatively low cost put meaning force per unit area on traditional businesses like newspapers and brick-and-mortar retailers.
Relying on wide net connectivity, the next wave of companies created novel, transformative applications that fundamentally changed the way businesses created and captured value. These companies were built on a new peer-to-peer architecture and generated value by coordinating distributed networks of users. Think of how eBay inverse online retail through auctions, Napster inverse the music industry, Skype inverse telecommunications, and Google, which exploited user-generated links to provide more relevant results, changed web search.
Companies are already using blockchain to track items through complex supply chains.
Ultimately, information technology took more than 30 years for TCP/IP to motility through all the phases—single utilize, localized employ, exchange, and transformation—and reshape the economy. Today more than one-half the earth'southward most valuable public companies have cyberspace-driven, platform-based business models. The very foundations of our economy take changed. Physical scale and unique intellectual property no longer confer unbeatable advantages; increasingly, the economical leaders are enterprises that act equally "keystones," proactively organizing, influencing, and coordinating widespread networks of communities, users, and organizations.
The New Architecture
Blockchain—a peer-to-peer network that sits on top of the cyberspace—was introduced in October 2008 every bit office of a proposal for bitcoin, a virtual currency system that eschewed a primal authority for issuing currency, transferring ownership, and confirming transactions. Bitcoin is the offset application of blockchain technology.
The parallels between blockchain and TCP/IP are clear. Simply as electronic mail enabled bilateral messaging, bitcoin enables bilateral financial transactions. The development and maintenance of blockchain is open, distributed, and shared—but like TCP/IP'due south. A team of volunteers around the world maintains the core software. And only like electronic mail, bitcoin starting time defenseless on with an enthusiastic only relatively pocket-sized customs.
TCP/IP unlocked new economic value by dramatically lowering the cost of connections. Similarly, blockchain could dramatically reduce the cost of transactions. Information technology has the potential to become the arrangement of record for all transactions. If that happens, the economy will once again undergo a radical shift, as new, blockchain-based sources of influence and control emerge.
Consider how concern works now. Keeping ongoing records of transactions is a core function of any business concern. Those records track past actions and performance and guide planning for the future. They provide a view not only of how the arrangement works internally but also of the organisation's outside relationships. Every organization keeps its own records, and they're individual. Many organizations accept no master ledger of all their activities; instead records are distributed across internal units and functions. The problem is, reconciling transactions beyond individual and private ledgers takes a lot of fourth dimension and is prone to error.
For example, a typical stock transaction can be executed within microseconds, oftentimes without human intervention. However, the settlement—the ownership transfer of the stock—can take as long equally a week. That'southward because the parties have no admission to each other's ledgers and can't automatically verify that the avails are in fact owned and can exist transferred. Instead a serial of intermediaries deed as guarantors of avails equally the tape of the transaction traverses organizations and the ledgers are individually updated.
In a blockchain system, the ledger is replicated in a large number of identical databases, each hosted and maintained past an interested party. When changes are entered in one copy, all the other copies are simultaneously updated. So equally transactions occur, records of the value and avails exchanged are permanently entered in all ledgers. There is no demand for third-party intermediaries to verify or transfer ownership. If a stock transaction took place on a blockchain-based system, it would be settled within seconds, securely and verifiably. (The infamous hacks that have hit bitcoin exchanges exposed weaknesses not in the blockchain itself just in separate systems linked to parties using the blockchain.)
A Framework for Blockchain Adoption
If bitcoin is similar early east-mail, is blockchain decades from reaching its full potential? In our view the answer is a qualified aye. We tin't predict exactly how many years the transformation will accept, merely nosotros tin can judge which kinds of applications volition proceeds traction first and how blockchain'due south broad acceptance will eventually come about.
The adoption of foundational technologies typically happens in four phases. Each phase is defined by the novelty of the applications and the complexity of the coordination efforts needed to make them workable. Applications low in novelty and complexity proceeds credence first. Applications high in novelty and complication take decades to evolve but tin transform the economic system. TCP/IP technology, introduced on ARPAnet in 1972, has already reached the transformation phase, just blockchain applications (in ruddy) are in their early days.
In our analysis, history suggests that two dimensions affect how a foundational applied science and its business use cases evolve. The starting time is novelty—the degree to which an application is new to the earth. The more novel it is, the more than effort will be required to ensure that users understand what issues it solves. The second dimension is complexity, represented past the level of ecosystem coordination involved—the number and diversity of parties that need to piece of work together to produce value with the engineering science. For example, a social network with merely one member is of picayune use; a social network is worthwhile only when many of your own connections take signed on to it. Other users of the application must be brought on board to generate value for all participants. The aforementioned volition exist true for many blockchain applications. And, as the calibration and bear upon of those applications increment, their adoption will require significant institutional change.
Nosotros've developed a framework that maps innovations confronting these two contextual dimensions, dividing them into quadrants. (See the exhibit "How Foundational Technologies Take Hold.") Each quadrant represents a phase of technology development. Identifying which one a blockchain innovation falls into volition help executives understand the types of challenges it presents, the level of collaboration and consensus information technology needs, and the legislative and regulatory efforts it will require. The map will also suggest what kind of processes and infrastructure must be established to facilitate the innovation'south adoption. Managers can use it to assess the state of blockchain development in any manufacture, as well as to evaluate strategic investments in their own blockchain capabilities.
Unmarried use.
In the first quadrant are low-novelty and low-coordination applications that create better, less costly, highly focused solutions. E-mail, a cheap alternative to telephone calls, faxes, and snail mail, was a single-use application for TCP/IP (even though its value rose with the number of users). Bitcoin, likewise, falls into this quadrant. Even in its early days, bitcoin offered firsthand value to the few people who used it but as an alternative payment method. (You can think of it equally a circuitous email that transfers not only information only likewise actual value.) At the finish of 2022 the value of bitcoin transactions was expected to striking $92 billion. That'southward still a rounding fault compared with the $411 trillion in total global payments, but bitcoin is growing fast and increasingly important in contexts such as instant payments and foreign currency and asset trading, where the present financial system has limitations.
Localization.
The second quadrant comprises innovations that are relatively high in novelty only need merely a limited number of users to create firsthand value, and so it's still relatively easy to promote their adoption. If blockchain follows the path network technologies took in business, we can await blockchain innovations to build on single-utilize applications to create local individual networks on which multiple organizations are continued through a distributed ledger.
Much of the initial private blockchain-based development is taking place in the fiscal services sector, often within small networks of firms, so the coordination requirements are relatively modest. Nasdaq is working with Chain.com, one of many blockchain infrastructure providers, to offer technology for processing and validating financial transactions. Bank of America, JPMorgan, the New York Stock Substitution, Fidelity Investments, and Standard Chartered are testing blockchain technology every bit a replacement for paper-based and transmission transaction processing in such areas as trade finance, strange exchange, cantankerous-edge settlement, and securities settlement. The Bank of Canada is testing a digital currency called CAD-coin for interbank transfers. We anticipate a proliferation of private blockchains that serve specific purposes for various industries.
Substitution.
The 3rd quadrant contains applications that are relatively low in novelty because they build on existing single-utilise and localized applications, just are loftier in coordination needs because they involve broader and increasingly public uses. These innovations aim to replace unabridged ways of doing business. They face loftier barriers to adoption, still; not simply do they require more than coordination but the processes they hope to replace may exist full-blown and deeply embedded within organizations and institutions. Examples of substitutes include cryptocurrencies—new, fully formed currency systems that have grown out of the simple bitcoin payment technology. The critical deviation is that a cryptocurrency requires every party that does monetary transactions to prefer it, challenging governments and institutions that have long handled and overseen such transactions. Consumers also have to change their behavior and empathize how to implement the new functional capability of the cryptocurrency.
A contempo experiment at MIT highlights the challenges alee for digital currency systems. In 2022 the MIT Bitcoin Club provided each of MIT's 4,494 undergraduates with $100 in bitcoin. Interestingly, thirty% of the students did not even sign upwards for the gratuitous coin, and twenty% of the sign-ups converted the bitcoin to greenbacks within a few weeks. Fifty-fifty the technically savvy had a tough fourth dimension understanding how or where to apply bitcoin.
1 of the near ambitious substitute blockchain applications is Stellar, a nonprofit that aims to bring affordable financial services, including banking, micropayments, and remittances, to people who've never had access to them. Stellar offers its own virtual currency, lumens, and too allows users to retain on its arrangement a range of avails, including other currencies, telephone minutes, and data credits. Stellar initially focused on Africa, particularly Nigeria, the largest economy there. It has seen pregnant adoption among its target population and proved its cost-effectiveness. But its future is by no ways certain, because the ecosystem coordination challenges are high. Although grassroots adoption has demonstrated the viability of Stellar, to become a banking standard, it will need to influence government policy and persuade central banks and big organizations to use it. That could take years of concerted try.
Transformation.
Into the last quadrant fall completely novel applications that, if successful, could change the very nature of economic, social, and political systems. They involve coordinating the activity of many actors and gaining institutional agreement on standards and processes. Their adoption volition require major social, legal, and political change.
"Smart contracts" may be the nearly transformative blockchain application at the moment. These automate payments and the transfer of currency or other avails as negotiated conditions are met. For instance, a smart contract might send a payment to a supplier as shortly equally a shipment is delivered. A business firm could bespeak via blockchain that a particular skilful has been received—or the production could accept GPS functionality, which would automatically log a location update that, in turn, triggered a payment. We've already seen a few early experiments with such self-executing contracts in the areas of venture funding, banking, and digital rights management.
The implications are fascinating. Firms are congenital on contracts, from incorporation to buyer-supplier relationships to employee relations. If contracts are automated, then what volition happen to traditional house structures, processes, and intermediaries like lawyers and accountants? And what nearly managers? Their roles would all radically change. Before we get too excited here, though, let's retrieve that we are decades abroad from the widespread adoption of smart contracts. They cannot be constructive, for instance, without institutional buy-in. A tremendous degree of coordination and clarity on how smart contracts are designed, verified, implemented, and enforced will be required. We believe the institutions responsible for those daunting tasks volition accept a long fourth dimension to evolve. And the applied science challenges—peculiarly security—are daunting.
Guiding Your Approach to Blockchain Investment
How should executives think about blockchain for their own organizations? Our framework can help companies identify the correct opportunities.
For most, the easiest place to outset is unmarried-use applications, which minimize take a chance because they aren't new and involve little coordination with third parties. One strategy is to add bitcoin as a payment mechanism. The infrastructure and market for bitcoin are already well adult, and adopting the virtual currency volition forcefulness a variety of functions, including IT, finance, bookkeeping, sales, and marketing, to build blockchain capabilities. Another low-risk approach is to employ blockchain internally as a database for applications like managing physical and digital assets, recording internal transactions, and verifying identities. This may be an especially useful solution for companies struggling to reconcile multiple internal databases. Testing out single-use applications volition aid organizations develop the skills they need for more-advanced applications. And thanks to the emergence of cloud-based blockchain services from both commencement-ups and large platforms like Amazon and Microsoft, experimentation is getting easier all the fourth dimension.
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Localized applications are a natural adjacent stride for companies. We're seeing a lot of investment in private blockchain networks right at present, and the projects involved seem poised for real short-term impact. Financial services companies, for instance, are finding that the individual blockchain networks they've ready with a express number of trusted counterparties can significantly reduce transaction costs.
Organizations can too tackle specific bug in transactions across boundaries with localized applications. Companies are already using blockchain to track items through complex supply bondage, for example. This is happening in the diamond industry, where gems are being traced from mines to consumers. The technology for such experiments is now available off-the-shelf.
Developing substitute applications requires conscientious planning, since existing solutions may be difficult to dislodge. One way to go may be to focus on replacements that won't require end users to change their behavior much but present alternatives to expensive or unattractive solutions. To get traction, substitutes must deliver functionality as good as a traditional solution'south and must be easy for the ecosystem to absorb and prefer. Kickoff Data'south foray into blockchain-based souvenir cards is a good example of a well-considered substitute. Retailers that offer them to consumers tin can dramatically lower costs per transaction and enhance security by using blockchain to track the flows of currency inside accounts—without relying on external payment processors. These new souvenir cards fifty-fifty allow transfers of balances and transaction adequacy betwixt merchants via the common ledger.
Blockchain could slash the cost of transactions and reshape the economy.
Transformative applications are even so far abroad. But it makes sense to evaluate their possibilities now and invest in developing applied science that can enable them. They will be virtually powerful when tied to a new concern model in which the logic of value creation and capture departs from existing approaches. Such business models are hard to adopt but tin unlock future growth for companies.
Consider how constabulary firms will have to change to brand smart contracts feasible. They'll need to develop new expertise in software and blockchain programming. They'll probably likewise take to rethink their hourly payment model and entertain the idea of charging transaction or hosting fees for contracts, to name simply 2 possible approaches. Any tack they have, executives must be sure they understand and have tested the business model implications before making any switch.
Transformative scenarios will take off final, just they volition too deliver enormous value. 2 areas where they could take a profound impact: large-calibration public identity systems for such functions equally passport control, and algorithm-driven determination making in the prevention of money laundering and in complex fiscal transactions that involve many parties. We expect these applications won't reach broad adoption and critical mass for at least another decade and probably more than.
Transformative applications volition also give rise to new platform-level players that will coordinate and govern the new ecosystems. These will be the Googles and Facebooks of the side by side generation. Information technology will require patience to realize such opportunities. Though it may be premature to kickoff making significant investments in them at present, developing the required foundations for them—tools and standards—is even so worthwhile.
CONCLUSION
In addition to providing a expert template for blockchain'southward adoption, TCP/IP has most likely smoothed the way for it. TCP/IP has become ubiquitous, and blockchain applications are beingness congenital on top of the digital data, communication, and computation infrastructure, which lowers the cost of experimentation and will let new utilise cases to emerge speedily.
With our framework, executives tin can figure out where to start building their organizational capabilities for blockchain today. They need to ensure that their staffs learn about blockchain, to develop company-specific applications beyond the quadrants we've identified, and to invest in blockchain infrastructure.
But given the fourth dimension horizons, barriers to adoption, and sheer complexity involved in getting to TCP/IP levels of credence, executives should think carefully virtually the risks involved in experimenting with blockchain. Clearly, starting pocket-size is a good way to develop the know-how to call up bigger. But the level of investment should depend on the context of the company and the industry. Financial services companies are already well downwards the road to blockchain adoption. Manufacturing is not.
No matter what the context, there'due south a strong possibility that blockchain will affect your business. The very big question is when.
A version of this commodity appeared in the January–February 2022 issue (pp.118–127) of Harvard Business Review.
Source: https://hbr.org/2017/01/the-truth-about-blockchain
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