Harvard Business Review: Blockchain fires, but you may know a little about it

Text: Marco Iansiti Karim Lakhani

Translation: Liu Weiwei

Source: Harvard Business Review

Recently, the release of a major policy has made the blockchain once again a hot topic, and various blockchain concept stocks have also risen. The various voices agree that the blockchain is another big wave after the Internet and will bring huge opportunities for change to all walks of life as an infrastructure.

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It is true that blockchain, as a fundamental technology, has the potential to create new foundations for economic and social systems. But the blockchain also has the risk of having to pay attention. Research experience in the field of technological innovation tells us that only by eliminating obstacles in many aspects such as technology, organization and society can the blockchain revolution really happen. Therefore, it is still necessary to have a clear and rational understanding of the blockchain. Almost everyone has heard this saying: the blockchain will revolutionize the industry and redefine the company and the economy. Why do you say that?

Contracts, transactions and their records are structures that play a decisive role in our economic, legal and political systems. They protect assets and determine organizational boundaries, establish and verify identity and historical events, influence interactions between different countries, organizations, communities and individuals, and guide social and managerial actions. But these key tools and the resulting bureaucracies have not been able to catch up with the pace of economic digital transformation, which is as clumsy as chasing an F1 car during peak traffic jams. In the digital world, the way we adjust and maintain administrative controls must change.

Blockchain has the potential to solve this problem.

It is the core technology of bitcoin and other virtual currencies. It is an open source distributed ledger that efficiently records transactions between buyers and sellers and ensures that these records are verifiable and permanently stored. The ledger can also be automatically initiated by setting.

The great potential of the blockchain is that if it gets popular, future contracts will be embedded in digital code and stored in a transparent, shared database that prevents data from being deleted, tampered with, and revised. By then, each agreement, process, task, and payment will have a digital record and signature that can be identified, verified, saved, and shared. Intermediaries such as lawyers, agents, and bankers may not be necessary trading participants. The transactions and interactions between individuals, organizations, machines and algorithms will be smooth and unobstructed.

We are also optimistic about the potential of the blockchain, but we are also worried that it will be killed. What we are worried about is not just the security risks of the blockchain, such as the collapse of a bitcoin trading platform in 2014 and more recent hacking. The research experience in the field of technological innovation tells us that only by eliminating obstacles in technology, government control, organization and society can the blockchain revolution really happen. If you don't know how the blockchain will occupy the highlands, it is a mistake to start blockchain innovation.

We believe that industry and government reforms that are truly guided by blockchain will not be realized until many years later. The reason is that the blockchain is not a “disruptive” technology, it cannot subvert the traditional business model with lower cost solutions and quickly overwhelm the incumbent.

Blockchain is a “basic” technology: it has the potential to create new foundations for economic and social systems. Although it has a huge impact, it still takes decades to penetrate into our economic and social infrastructure. As the wave of technological and institutional reforms gains momentum, the application of blockchain will advance steadily. We will explore this insight and its strategic implications in this article.

New architecture

The blockchain is a P2P network based on the Internet and was first applied to the Bitcoin protocol in October 2008. Bitcoin is a virtual currency system; it decentralizes currency issuance, ownership transfer, and transaction confirmation. Bitcoin is the first application case for blockchain technology.

Under the current business model, continuous record trading is a core function of every company. These records track past actions and performance and guide the development of future plans. Records not only illustrate the internal operations of the organization, but also the external relationships of the organization. Each organization has its own records and is not open to the public. Many organizations do not record the general ledger of all activities; instead, these records are governed by internal departments and functions. The problem is that it takes a long time to check all the transactions in the private books, and it is easy to make mistakes.

For example, a stock transaction can be carried out in a few microseconds, often without manual intervention. However, the equity transfer may take a week, because the parties to the transaction cannot see each other's books, and the actual ownership and transfer rights of the assets cannot be automatically confirmed. Organizing the exchange of transaction records requires a series of intermediaries to act as guarantors of the assets; the books are also updated one by one.

In the blockchain system, the books are replicated in a large number of identical databases, each managed and maintained by a single stakeholder. If any of the files are changed, all other files will be updated at the same time. Similarly, if a new transaction occurs, the record of the transaction asset and value will appear in all books and will be saved permanently. It is not necessary to ask a third party intermediary to confirm or transfer ownership. Equity trading in a blockchain-based system can be completed within seconds, both safe and well documented. (The notorious hacking of Bitcoin transactions did not highlight the weaknesses of the blockchain itself; instead, these events reflected serious vulnerabilities in separate systems connecting users of different blockchains.)

Popularization of the blockchain framework

If bitcoin is like an early e-mail, then does the blockchain have to wait for many years to fully realize its potential? For this question, we have to give an answer that is not completely certain. We can't accurately predict how long it will take for the blockchain reform to take place, but we can guess what technology applications will be the first to be welcomed and how the blockchain will eventually be realized.

Looking back at history, we believe that there are two dimensions that affect the expansion and evolution of basic technologies and their commercial cases. The first dimension is novelty, the freshness of technology applications relative to external things. The higher the novelty, the more effort developers must spend to ensure that users understand the problems that new technologies can solve. The second dimension is complexity, or the degree of ecosystem coordination required by technology applications – the number and diversity of stakeholders involved in the use of new technologies.

For example, a social network with only one member is basically useless; it only makes sense to build this social network after enough contacts have logged in. Other users are also involved so that all participants can get value. The same is true for the operation of blockchain technology applications. In addition, as these new applications grow in size and influence, their popularity will require major institutional reforms.

The framework we have established starts from the above two contextual dimensions and divides four quadrants, and divides different forms of innovation into different quadrants. Different quadrants represent different stages of technological development. Determining which quadrant a innovation in a blockchain belongs to helps executives recognize what challenges they will face, what level of cooperation and consensus must be reached, and what legislative and regulatory measures are needed. The chart also shows what processes and infrastructure are needed to promote the spread of innovation. Managers can use it to assess the development of blockchains in various industries and to examine the company's strategic investments in building blockchain capabilities.

A single case. Technology applications with both novelty and coordination are in the first quadrant; these innovations lead to more efficient, lower cost, customized solutions. Email is a single application case for TCP/IP (although its value increases with the number of users), it is a cheap alternative to telephony, fax and traditional postal delivery. Bitcoin also falls into this quadrant. In its early stages of development, even users who only use Bitcoin as a means of payment are unlikely to get value immediately. (You can think of Bitcoin as an email, but it's more complicated, not only to convey information, but also to deliver real value.) At the end of 2016, the forecast for bitcoin transactions was $92 billion. Although this figure is only a fraction of the $411 trillion in global payments, Bitcoin is growing rapidly and is becoming increasingly important in areas where current financial systems such as real-time payments, foreign currency and asset transactions have limitations. .

Localization. The innovations that make up the second quadrant are higher, but because such innovations require only a limited number of users to create instantly available value, it is not difficult to promote their popularity. If the blockchain enters the enterprise with the same route as the network technology, we can expect that the blockchain innovation will be based on a single application case, creating a local private network that allows multiple organizations to connect to each other through a distributed ledger.

Many of the early blockchain-based innovations have appeared in the financial services sector, and are generally in small networks of companies, so the requirements for coordination are not too high. Nasdaq is working with Chain.com, one of the blockchain infrastructure providers, to provide technology for processing and validating financial transactions. Bank of America, JPMorgan, the New York Stock Exchange, Fidelity Investments and Standard Chartered are testing blockchain technology in an attempt to replace the paper-based manual transaction process and Applications in trade finance, foreign exchange trading, cross-border settlement and securities settlement. The Bank of Canada is testing a digital currency called CAD-coin for cross-bank transfers. We predict that the private blockchain will proliferate in the future and play a specific role in all walks of life.

Replace. The innovation of the third quadrant is based on the application of individual cases and localization techniques, so the novelty is low, but due to its wider scope and scope, the coordination is very high. These innovations are designed to replace the entire business model, but they also face significant barriers – they require greater coordination, and the processes that they want to replace may be mature and entrenched in organizations and institutions. Alternative cases include cryptocurrency. This is a sound new currency system evolved from simple bitcoin payment technology. The biggest difference between the two is that crypto-digital currencies require the use of the system for all parties involved in currency transactions, which poses challenges for governments and institutions that have long dealt with and regulated such transactions. Consumers also need to change their behavior patterns and learn how to use the new features of encrypted digital currency.

reform. Located in the fourth quadrant is a new technology application. These innovations can change the nature of the economic, social and political systems as long as they succeed. Such innovations require coordination of multiple actions and agreement with the appropriate institutions on standards and processes; their popularity requires major social, legal and political reforms.

"Smart contracts" are probably the most revolutionary blockchain technology applications available today. As long as the transaction meets the terms of the contract, the smart contract can realize automatic payment and automatic transfer of other assets such as currency. For example, a smart contract can pay the payables to the supplier immediately after the goods are signed. A company's available blockchain indicates that a particular item has been signed; or the product may have a GPS tracking function that automatically updates the geographic location in the blockchain, which in turn can initiate a payment. We have seen early experiments on some auto-effective contracts, including venture capital, banking and digital copyright protection.

The prospects for smart contracts are great. The company is built on the basis of contracts; from the composition of the legal team to the relationship between the buyer and the supplier, and then to the employee relationship, the signing of the contract is essential. If the contract can be generated automatically, what will happen to the traditional corporate structure, processes, and intermediaries such as lawyers and accountants? What impact will managers have? Their responsibilities will change dramatically.

But we are excited about this idea too early. It is important to remember that the days when smart contracts were widely popular were still a few decades away from us. Without the support of many institutions or other forces, smart contracts do not play a role. Such contracts can only realize their potential if they are highly coordinated and clarified on how to design, validate, implement and enforce them. We believe that it takes a long time for these organizations to take the responsibility to complete the transition. They face serious technical challenges, especially security challenges.

Blockchain investment guidance

How do executives lay out blockchains for their organization?

In general, the easiest way is to start with a technical application located in a single case quadrant. This can minimize risk because these innovations are not new and there is little requirement for third-party coordination. One of the company's strategies is to make Bitcoin a payment mechanism. Bitcoin's infrastructure and market are mature, and the use of virtual currency forces multiple functional departments (including IT, finance, accounting, sales, and marketing) to forge blockchain capabilities.

Another low-risk approach is to use the blockchain as an internal database that holds data for multiple applications, such as information in physical and digital asset management software, internal transaction records, and identity confirmation information. Some companies have been overwhelmed by keeping the internal database information consistent; for them, introducing a blockchain is an extremely effective solution. Testing a single-case technical application helps organizations develop the necessary new skills to prepare for the use of more advanced software. With the emergence of blockchain cloud services (startups and large platforms like Amazon and Microsoft offer such services), experimentation is becoming easier. Developing a localized technology application is the second step that the company will naturally take. We see that the investment in the private blockchain network is huge today, and the related projects seem to be effective in the short term. For example, some financial services companies have found that their private blockchain network, established with a limited number of reliable trading partners, can significantly reduce transaction costs.

Organizations can also leverage localized applications to address specific issues that arise in cross-border transactions. For example, companies have begun to use blockchain technology to track products in complex supply chains. In the diamond industry, the blockchain can continue to track the gemstones from the excavation to the sale stage. The technology of this type of experiment is now very convenient to apply.

Developing a replacement technology application requires a rigorous plan, as existing solutions can be difficult to subvert. One of the reforms is to focus on new products that don't require end users to make too many changes, and to ensure that users get a cheaper, or more attractive solution. To enhance attractiveness, alternative innovations must ensure that product performance and traditional solutions are equally excellent and complete, while at the same time facilitating the adoption of their own technologies across the ecosystem.

Reformed technology applications are still far away from us. But now it is still worthwhile to assess its potential and invest in the development of the necessary infrastructure. Once these innovations are bundled with new business models that are different from previous value creation and capture methods, they can be used to their fullest potential. Although accepting a new business model requires a lot of effort, it can open the door to the company's future growth.

Executives can use the framework we have summarized to determine the first step in building blockchain capabilities. They must ensure that employees understand the blockchain, develop technology applications that fit their own in the four quadrants mentioned above, and invest in blockchain infrastructure.

But given the investment period, the barriers to new technology adoption, and the complexity of achieving the same level of acceptance as TCP/IP, executives must also be cautious about the risks of blockchain experiments. Obviously, starting from a small place is a good way to lay a professional foundation for a bigger dream. But the investment should depend on the specific background of the company and the industry in which it operates. Financial services companies have already begun to use blockchain technology, but the manufacturing industry has not yet taken action.

Regardless of the background of your company, blockchain can affect you. This prospect is already very clear; everything is just a matter of time.

Marco Jansetti is a professor of business administration at Harvard Business School, David Sarnoff. Karim Lahani is a professor of business administration at Harvard Business School and a principal investigator at Harvard University's Institute of Quantitative Social Sciences.

This article is abridged. The original text is in the Chinese version of the Harvard Business Review. The January 2017 issue of Blockchain Truth.

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