A Decision Tree for Blockchain Applications: Problems, Opportunities or Capabilities?
I was recently trying to explain the blockchain and its impact on financial services to a smart McKinsey consulting professional, and he said to me: “What problem is the blockchain solving?”
It was an inquisitive question that led me to organize my thinking by categorizing the blockchain’s impact into 3 broad categories:
1) Solving Problems, 2) Creating Opportunities, 3) Applying Capabilities.
The “problems” category comes in a variety of flavors. It forces the thinking around understanding if the blockchain has immediate applications that could impact:
- Cost savings
- Time delays
That list is not a list of “problems” in the pure sense of the word, but it is a list of fundamental business parameters that any organization wishes to streamline. In this case, the blockchain is an invisible enabler that doesn’t change much to the externally visible parts of a business. It’s more of an internal black box that does something differently than before.
As I said previously, corporations did not plan for the blockchain two years ago. It was a 2015 surprise mostly, and many of them are planning for it now. This means we may only start to see flushed out plans and full realizations take shape in 2-3 years, given the latency of planning processes and realistic post-planning implementations.
Of course, the above list represents an internal organizational view on problem solving.
Taking an external view, there are larger, global problems that are also potential targets for the blockchain, and they are related to the economy, industries, government or society. Some of these have philosophical or ideological roots that are driving them. Pick your flavor of grievance or issue around the world, and there might be a decentralization-based flavor of a solution, which is undoubtedly linked to a blockchain.
But just asking what problem the blockchain solves is a limiting question, on its own. For example, if you look at the startup innovation around banks in FinTech, you will see plenty of cases where these new companies didn’t really solve a “problem” the banks had, but they tackled a particular market or service differently. So the tipping point was to compete by re-framing the opportunity, e.g. peer to peer lending, unconventional home loans, efficient robot investing, etc. This leads us to the next aspect: the Opportunity view.
It is more difficult to figure out opportunities, because it requires applying innovation, being creative, and making more profound changes. These are more difficult objectives than cost savings, because business process changes are involved, and it takes a lot longer to change them. When you sum it up, the blockchain is about 80% business process changes, and 20% technology implementation.
New Opportunities include entering new markets and/or providing new services that the blockchain enables and that were not possible before. It requires a more imaginative process of dreaming up what’s possible and what wasn’t done before. It requires thinking outside the proverbial box, and a deep understanding of what the blockchain can enable in the areas that it is strongly suited for.
These new opportunities could also develop as new markets around 3 spaces: inside your organization, collaboratively between two or several organizations, or in totally new areas that don’t initially interface with internal processes. Arguably, anything done on the outside might be easier to tackle because you’re not initially tied down by your core integration requirements.
This brings us to the third category of thinking: applying the blockchain’s capabilities from the ground-up. In other words, the starting point here is a deep understanding of what the blockchain enables, and there is a long list of jumping points that I’ve already written about in Explaining the Blockchain’s Impact via an Infographic, and expanded on it via the following decision tree diagram.
It’s a lot easier for someone to understand the blockchain than for a blockchain person to understand someone’s business.
For example, you can’t directly compare the blockchain to a database and say – the database does this better therefore we don’t need blockchain transactions. The blockchain is a new paradigm. Rather, start by running smart contracts on a blockchain, and ask yourself what it can enable, then work backwards to see how you can tie it back to your business. There is a certain magic that occurs when you’re running business logic on a decentralized consensus layer that is not controlled by any single entity, yet it is jointly owned and operated by several parties who collectively benefit from this arrangement. There is magic when you figure out the blockchain’s touch points to your business and you start offering new user experiences that didn’t exist before.
When looking at your blockchain strategy, I believe that you need to tackle all three elements in parallel: problem solving, opportunities discovery and capabilities enablement. That’s the trinity of sanity for an organizational blockchain strategy.
Your post is insightful as always, and given that I’ve had the same conversations that kicked this off for you, I’m sympathetic to having to come up with a helpful response. My “go to” response has been that blockchain enables a new and greatly improved trust model in the digital age. Trust, in all its glory and for all the lip service given to it, has been broken for some time in the digital world. Over the past 10+ years, we’ve learned more and more about how marketers have abused information about us, how governments have unduly collected and accessed information about us, and how frequent hacking attacks are on centralized repositories of information about us, all without our consent or knowledge in most cases. Scandals like those around the financial meltdowns we’ve seen in various countries have also not helped the trust case, especially given the complicity of those regulating third parties who were complicit in those events (be it Enron and their auditors or the mortgage-backed securities crisis and the ratings and regulatory agencies). If we extend this metaphor to the Constitutional definition of “persons”, then that includes “virtual persons” (aka. corporations), all whose trust is constantly being violated. Trust is at an all time low for individuals and corporations.
In your diagram, there was a list of capabilities of which I’d say every single one, with no exception, is a trust matter. If we think about the amount of paperwork and processes put in place to support most transactions (whether between people, between people and companies, or between companies), we can see that these all serve to build trust in those transactions. While in the physical world things moved slowly enough that we could deal with 3-5 day wait times on check deposits clearing or weeks for credit to be checked for loans, in the fast moving digital world, in the world of “scale”, there are too many transactions, too many interactions, for any of the physical world processes to make sense. To date, we have clumsily just ported physical world processes into the online world, and we’ve paid the price with fraud and database attacks at an all-time high.
Addressing digital trust is what I feel that Bitcoin has really delivered on, and created a model to build on. Rethinking all of our processes from the perspective of “why do we have this step?”, and coming to terms with its historical legacy based on needed trust principles, we will find that the trust problem has really been the one we’ve really had all along but kept trying to blame other things because the historical context blinded us to this fact. We forgot why certain tasks were being performed. What’s interesting with considering “trust” as the central engine of change also provides us an interesting perspective from which to judge all interactions, be it machine-to-machine communications, MRP/ERP systems, accounting systems, medical records, money systems, etc…etc…
The people who should be rejoicing the most, and encouraging the use of the Blockchain, should be *every* regulator around the world. Finally, a technology has emerged that enables companies to immutably record and log the appropriate info required by the regulations that they are subject to. This then enables regulators to keep up with companies’ meeting of such regulations programmatically in proactively rather than statistically (taking in samples) retroactively. This wouldn’t require them to have more people to manage this process, just more code, and perhaps even less people (unless lots of companies were not meeting their compliance obligations then the number of enforcement agents might go up ;). Imagine every accounting system enabling companies of any size, public or private, to publish the hash of their month-end financial statements, assuring investors and the board that this could not be tampered with and was the state of the company at that point in time. You wouldn’t need the SEC chiming in on this to know it was valid. Auditors could add a blockchain receipt confirming that they reviewed the docs on a specific date.
Viewing every problem that businesses and individuals face from a trust perspective, can lead to some very interesting conversations that I believe open up all of the points you’ve astutely listed above, and more.
Wow. What a great comment. Thank you.
What you described is also part of the blockchain opportunity and is kind of a “meta” realization of sorts.
Interesting post William.
“There is magic when you figure out the blockchain’s touch points to your
business and you start offering new user experiences that didn’t exist
Can you make this tangible?
Thanks William. Hoping that Tierion helps helps to bring about some of these wonderful opportunities 😉
“For example, you can’t directly compare the blockchain to a database and say – the database does this better therefore we don’t need blockchain transactions. The blockchain is a new paradigm. Rather, start by running smart contracts on a blockchain, and ask yourself what it can enable, then work backwards to see how you can tie it back to your business. ”
This is thought provoking, and I agree completely. I still have some scars trying to get large FI’s to change things from the inside, and it’s messy, so I’m still somewhat on the fence. There are big challenges here for larger FI’s in adopting blockchain that are not terribly visible from on high.
Challenge 1) C-level and board support, and past 1 year. Many new strategies die in Q3 when economic headwinds change and earnings approach. Blockchain strategies need strong, top-down, multi-year support.
Challenge 2) There are internal barriers from compliance and internal IT. First is compliance (i.e. the departmental version) – People working in this area internally are process oriented. They enforce rules; it’s their job. They do not throw out rules and let code run new rules. They see blockchain as an existential threat and dangerous, not something revolutionary and exciting. Second is IT – of course any larger FI has silos. There are always going to be executives in the IT area that are not blockchain experts or enthusiasts, and are more interested in protecting their “turf”. They also know most of the C execs have very limited comprehension of their complex tech stack, and are ‘flying blind’. They are often friends with the compliance folks in a. It’s only natural for people to have lunch, and talk about ways that this newfangled “blockchain” technology runs roughshod over regulation and can’t possibly be implemented. They will have very convincing arguments, oh, and by the way directors of the FI are personally and criminally liable if regulation isn’t followed in countless ways…
On 2 a/b, I vividly remember meetings with IT and compliance at many companies regarding new ideas that changed process. This unclassified CIA handbook on how to sabotage productivity from 1944 summarizes how these employees will behave (funny, because it’s true): https://www.cia.gov/news-information/featured-story-archive/2012-featured-story-archive/CleanedUOSSSimpleSabotage_sm.pdf
Challenge 3) playing nicely with coop-itiion / frenemies. FI’s can save money by lowering friction between themselves and other FI’s, and clearly reduce their OpEx related to these connections, and blockchain is a fantastic way to do this. It’s not hard to justify the capital for a project like this at all. The headwind here is competitive pressure, and also the potential for employees to leave one FI and join the other. Yes, they can save lots of OpEx by adopting the same standard, and do entirely new things, but the question is, can the leadership of different large FI’s with their own internal political problems also align with other large FI’s and agree in tandem? By the way, those compliance and IT departments at the different FI’s? They all know each other and used to work together in the past. Now that’s a challenge!
My bet? Most large FI’s will fail to change fast enough. Instead they will go on M&A benders, buying up small blockchain startups. The ones that do pull it off will have strong C-level / board support, and ensure that the R&D put towards such efforts is extremely insulated from the main business lines within the FI. The large FI’s that crack this first will eat the others’ lunches (survive). The other possibility is that small fintech companies bite off pieces of the larger FI’s by doing aspects of their business far more efficiently, with functions the large FI can’t perform due to outdated tech. This is pretty likely too.
I’m sure I sound like a grizzled skeptic with a raspy voice, but I can’t un-see what I have seen from the inside at big FI’s. It’s a very hard chess game to play well.
Really great article, and you have to remain optimistic. Just keep those R&D teams insulated!
I am seeing some progressive thinking within banks.
That’s encouraging. There are many, many brilliant and creative people working inside FI’s. I just appreciate the magnitude of the challenge. Cheers!
That’s a good question, and i’m going to expand on that, perhaps in another post. thanks for asking.