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Continuing our journey to discover blockchain, this week we are looking at the main strategic impact of blockchain technology on business models.
Blockchain technology brings a way new to transacting with each other. We arrived in an era of transparency, peer-to-peer networks and decentralization. But how will these impact business models? What changes can we expect in the next couple of years? How will blockchain add value?
Blockchain does not have to disrupt industries to create value
While many expect blockchain to disrupt traditional institutions, blockchain is more likely to be a useful tool in the hands of these established technology companies. Predictions show that traditional, big companies will be the first in using blockchains, establishing highly scalable permissioned blockchain networks. These networks will harness the benefits of transparency, cost reduction, and increased efficiencies. Customers of big enterprises are expected to share the benefits of blockchain applications through the updated services. New entrants in the market will have some space to target clients who do not get value from blockchain through their original providers.
This means the spread of permissioned blockchains first, where big enterprises still form a central entity. The advancement of permissioned blockchains will ultimately lay a base for the mass adoption of permissionless systems. As more and more people start to get familiar with blockchains in closed networks, they will become more open to trying permissionless, open applications. This transition can also provide time for open networks to solve their problems with scalability and security while maintaining a decentralized nature.
Overall feasibility is 3-5 years away
Blockchain technology has significant constraints which need to be tackled to have commercially viable solutions, especially when it comes to permissionless systems.
Firstly, the technology right now has significant trade-offs when it comes to choices in the size of the block, consensus, and the number of notaries. These affect the security, scalability, and speed of the blockchain, and prioritizing one means significant trade-offs among other factors. At the moment blockchain solutions might have suboptimal performance compared to databases, with added high switching costs. While this is a major hurdle towards mass adoption, the rapid development of the technology promises better solutions soon.
Secondly, there is a lack of common standards and regulations when it comes to sharing data and performing transactions on the blockchain. The technology brings an opportunity to connect a wide array of organizations from all levels internationally, which means that the new standards have to consider options, rules, and practices as never before. Due to high demand, there are already ongoing discussions in this area. Governments and organizations are cooperating actively to issue better legislation adapted to the technological possibilities.
A unique challenge from both a technological and legislative point of view is the digitization of different assets. While stock, bonds, real estate, equities and even fine art can be tokenized and traded effectively with blockchain, we are still at the beginning of laying down both the legislative and technological building blocks.
Lastly, blockchain has the potential to change the structure of several industries fundamentally. To achieve this, traditional competitors need to change their approach and focus more on cooperation with each other and legislators. This change in attitude will not be an easy or short journey.
The short-term strategic value appears in cost-effectiveness
Blockchain can remove plenty of transaction costs by connecting parties directly, eliminating intermediaries and reducing the need for individual reconciliations. Of the 90 use cases analyzed by McKinsey in 70% the short-term value at stake is cost reduction.
The core tasks of the financial services, healthcare, and government, are perfectly suited for blockchain capabilities. The government’s record keeping and verifying functions can be significantly enhanced by a distributed and secure database, and offer considerable savings in administrative costs. The financial sector can benefit from a fast and reliable transfer of assets between any parties, without the high cost of intermediaries.
This does not mean that blockchain technology only makes things cheaper. In the upcoming years, the technology is expected to evolve, creating entirely new business models and revenue streams.
If you would like to read more, feel free to hit up the McKinsey blockchain report here.