The best use-cases for blockchain are in business processes that involve multiple parties, are transactional, and involve reconciliation or arbitration.
Few technologies present opportunities for disruptive innovation better than Blockchain. Such technology, often referred to as a Distributed Ledger Technology, allows businesses to communicate with less friction and more trust.1 Businesses are rightly curious how this technology may breathe new life into their work flows.
I will assume my reader has a basic understanding of blockchain, and is looking for a practical next step of how this technology may find its home in their company. For those uninitiated, I will skip the technical details and simply say this: The simplest way to view blockchain is as a next generation database. Blockchains are immutable databases that record transactions securely. Such a product allows for smoother communication and improved governance and security. Implications exist for the Energy industry, which I will outline below.
Blockchain – that’s still a thing?
Tim Grant, CEO of R3, gave a great timeline of where we are at with distributed ledger technology:
2014: The year of enlightenment
2015: The Year of the Hype
2016: The Year of the PoC
2017: The Year of the Pilot
2018: The Year of Production
An enterprise can be a fast-follower or a leader. But you can’t be a fast follower during a paradigm shift. And we are in the middle of a paradigm shift. You can’t sit on the sidelines.2
Ready to get off the sidelines? Here are three questions you may be asking: What types of use cases are useful for blockchain technology? How can I sell blockchain to stakeholders? And finally, what are the “bewares” and risks of implementing blockchain?
What types of use cases are useful for blockchain?
Blockchain is as revolutionary as they say. It will reshape entire industries. It does have implications for almost every business process. However, it must continue to evolve.
It is easy for a forward-looking project manager to become overwhelmed by every promise blockchain offers. It has an implication for seemingly every problem domain out there. But here’s the current reality: Blockchain is sometimes a hammer looking for a nail.
While I, and many others, believe that blockchain will eventually become an underpinning layer of the Internet, one must look at the “low-hanging fruit” when implementing distributed ledger technology for the first-time in an enterprise setting. Yes, eventually everything will run on blockchain, but we need to prove out technology first, and there are certain project types that lend themselves well as a good candidate for a first time blockchain implementation.
The best candidate project will utilize distributed ledger technology not simply because of its technical superiority, but because of the superior operational workflow it enables.Implementation of blockchain should create business value. The end result should save time, remove cost, and reduce risk.
Processes ripe for this tech are therefore those that involve multiple parties, are transactional, and have an element that involves reconciliation, arbitration, or intermediation. In an enterprise setting, the process should probably involve a cost-center rather than revenue – it comes with less risk and is an easier sell to key stakeholders and regulators.
Consider your organization. Where does there exist silo’d systems, manual processes, and lack of transparency? Where are there many disjunct data sources or legacy systems?
One example is settlements and reconciliation in energy trading and risk management. Energy trading is composed of transactions that are tracked by multiple counterparties, in a manual process under regulatory and compliance scrutiny. Settlement takes almost a month after a commodity is consumed, and reconciliation occurs over the next six months. Hundreds of people are involved. That’s a lot of room for capital efficiency.
Reconciliation is costly. According to the Chicago Mercantile Exchange, some 1600 people are employed by the average bank to assist with reconciliation each year. This costs the banking industry some ~$15B.3
There will certainly be revenue opportunities from Distributed Ledger Technology, and we will find those as the ecosystem evolves. But in the meantime, we have our hands full in cost saving activities alone. Reduction of reconciliation and remediation processes can create huge cost savings. Start there.
Still stuck? Here’s a hit list of use cases in oil and gas and electricity:
- Supply Chains.
- Land and mineral rights.
- Materials management for capital projects.
- Commodities trading and settlements.
- More efficient carbon credit markets.
- Net-metering load balancing.
- Better governance of energy mix used in supply generation.
Each of these will benefit from immutability, a secure data repository, and operational efficiencies from reduced dispute resolution. Best of all, blockchain is being abstracted enough that we can take a shadow approach – the user interface won’t change – just the plumbing.
These should perk your ears: Cost centers. Reconciliation and mediation. Manual processes. Multiple Parties.
How can I sell blockchain to stakeholders?
Perhaps you have identified a good candidate project and are ready to explore an implementation. But it sure does get confusing out there, doesn’t it? The product offerings are bewildering:
private or public blockchains?
open-source? Industry-specific DLTs?
Permissioned or permissionless?
If I have a project selected, how do I actually “make blockchain happen” and avoid paralysis by analysis?
To the CTO overwhelmed and confused on how to navigate this crowded environment, I would simply offer the following words of comfort.
The POC comes before the pilot which comes before the product.
This is your development path. And we know that following such a path allows one to change direction before the digital concrete is poured.
And if we begin with a POC, the stakes are low. You can “prove-out” and see in a tangible way whether public/private and permissioned/permission less chains are optimal, and then you can choose one for the next stage: the pilot. If our candidate project truly solves operational or financial inefficiencies, then we should have a clear definition of success by which we can choose the most optimal technology for our final product.
Another encouragement to those stuck in analysis: perhaps it is more useful to find the optimal vendor rather than to identify the optimal technology. What will sit better with your project sponsor – a pure, open-source, technically rich solution, or an offering from a trusted and familiar brand? Many blockchain purists decry projects like HyperLedger, but what will be easier to sell to the business stakeholder: an URL to a github repo or a salesdeck from IBM?
Finally, a major trend in distributed ledger technology is the preponderance of consortiums and partnerships. Leverage these. An organization may benefit from exploring this nascent technology with another player in their industry. Partnerships such as the Hyperledger Foundation and Ethereum Enterprise Alliance exist to help facilitate the exploration of this tech with like-minded industry leaders.
What are the risks?
Finally, I present this list of “bewares” and “gotchas” from a business perspective. Lists of technical risks abound, but if you are ready to explore a blockchain implementation, you should be mindful of these practical considerations.
- Vendor lock-in and selection
- Is the vendor and their distributed ledger product a start-up that will be around in a few years? Or is it a well-known brand that hawks an arguably inferior technology?
- Choosing a project that will be prone to increased compliance or regulatory oversight
- Does it hit revenue? Are the incumbents, innovators, and regulators willing to collaborate to achieve project success?
- Choosing a project that can be on the blockchain, but doesn’t need to be
- If you understand blockchain, then you perhaps believe that everything can and (maybe) should be on blockchain. But let us first focus on whether the use case may generate operational efficiencies and cost savings.
The uses for blockchain span multiple domains. Eventually, blockchain will be ubiquitous. But, for those of us in the real world, right now, we need to focus on the projects that will create the most business value. The best project candidates are those that involve multiple parties and involve processes that need reconciliation and arbitration. Supply Chain and settlements processes are often the first place to look. Enterprises should do what they can to be a leader in their industry in this space, and the ecosystem lends itself to enabling these innovators to succeed. Good luck!
- Less Friction and More Trust is a description coined by IBM. https://www.ibm.com/blockchain/what-is-blockchain.html
- Thanks to Tim Grant for this verbage, which was presented at Business and the Blockchain Conference at Rice University, April 23, 2017.
- Statistic presented by Sandra Ro, Director at Chicago Mercantile Exchange, at the Business and the Blockchain Conference at Rice University, April 23, 2017.