Blockchain in the enterprise

The following figure shows a number of blockchain use cases. The variety suggests that there are a lot of application-specific considerations for whether and how to employ blockchain solutions. Let's talk about the principles that should guide the use of blockchain in an enterprise.

Why would an enterprise want to apply blockchain technology to one of its systems or applications?

Figure 1.5: Blockchain use cases in various industries

What applications are a good fit?

Organizations will need to establish criteria for use during the application design process to help them assess where they can best apply blockchain technology. The following are some examples of criteria that could help an enterprise determine which applications or systems would benefit from it:

• Applications that adhere to trade, trust, and ownership: As described previously, these three tenets—trade, trust, and ownership—are fundamental to any blockchain system. Trade and ownership refer to the flow of assets and transfer of ledger entries, while trust pertains to the otherwise trustless nature of a transaction system.
• Applications that are fundamentally transactional in nature: There is often debate about why we can't achieve the benefits of blockchain from a distributed database, that is, a NoSQL or a relational database. But a multi-party transaction is what makes an application suitable for blockchain. There need to be long-running processes with numerous microtransactions that will be verified and validated by the blockchain-powered transaction system. Databases can still be used for persistence or replication to fit enterprise systems, however. Other considerations include a small dataset size that could increase over time, logging overhead, and so on.
• Business networks that are comprised of non-monopolistic participants: This third criterion addresses distributed versus decentralized computation models. Blockchain trust systems can work within any model; however, the trust aspect of a blockchain business network comes from multi-party participants with non-monopolistic participation (the consortium permissioned network model). Oligopolistic participation might be acceptable (the private permissioned network model), but it's essential to devise a trust model that assures the prevention of centralized control, even with rational behavior of the participants. Many internal use cases do not adhere to this principle and constitute more distributed application models. (Models are discussed in Chapter 2, Exploring Hyperledger Fabric.)

For enterprises trying to understand or determine where to employ blockchain meaningfully, there's a simple approach for thinking through use case selection. An appropriate use case for a sustainable blockchain solution will achieve long-term business objectives and provide a strong return on technology investment.

This starts with an enterprise problem—an issue big enough for the enterprise to expend resources/time—and the recognition of cohorts that have the same problem. When companies realize that an enterprise problem is also an industry problem (such as securities lending, collateral lending, and so on), they've found a use case where the promise of blockchain has the most potential.

While organizations are determining the benefits of various aspects of blockchain for their enterprise applications, they also need to recognize the fragmentation of the whole blockchain landscape. There are numerous innovative approaches available for solving a specific challenge with blockchain. A lot of vendors offer variants of the trust system specialized to address particular use cases, and they've defined the use cases that will benefit most from blockchain in a given industry, for example. Such specialized vendors often promise a fast solution to meet consumer demands for quick digital interactions.

The tenets of blockchain can be instrumental in delivering rapid consumer-driven outcomes—such as decentralized, distributed, global, permanent, code-based, programmable assets, and records of transaction. We should exercise caution about thinking of blockchain as a hammer to solve every enterprise application challenge, but it can be of use in many transactional applications.

Now, let's discuss how blockchain is perceived in the enterprise and some of the challenges that arise with enterprise adoption of the technology. In the following section, we'll focus on three areas that help set the tone for blockchain in an enterprise context.

Enterprise blockchain business evaluation considerations

In this section, we'll consider important factors in making enterprise-level business decisions about blockchain and its implementation.

A few thoughts on blockchain business models

The following list outlines some important elements related to business models and related design imperatives:

• Business models are an important consideration, as the right business model will dictate the technology design and platform choices not only to seed the network, but also the robust design needed for growth.
• Business model design should provide a platform for business negotiation, contracting vehicles, and other business activities, such as procurement, shared services, legal services, administration, and so on. Business design includes a clear separation of blockchain network functions from business and other technology operations.
• A well-thought-out business model for blockchain networks provides an important avenue for business continuity, funding and sourcing models, and overall growth driven by the economic and financial structure of the business network powered by the tenets of blockchain technology.
• A well-crafted business design restores balance and smooth interactions between various entities that compete with some network participants and need to cooperate and co-create with some other network participants. The co-creation element of a blockchain network is essential for the sustained longevity and growth of the business of the blockchain network.
• Last, a blockchain business network can be a business in itself. A platform that facilitates co-creation and new synergies needs to be managed, operated with defined SLA levels, and have a robust governance structure that not only attracts new participants, but sustains the confidence and business benefit of its founders and existing participants.

Business growth and innovation

We see innovation and micro-innovation everywhere—be it from large companies such as Amazon and Netflix, a smaller start-up ecosystem focused on challenging the status quo, or open source frameworks such as Hyperledger. With access to technology, talent, and digital tools, enterprises small and large are rethinking their business models with a focus on embarking on a journey that has scale built into the business design.

Most businesses go through several stages on this journey:

• Creating the engine of growth: Creating a business model that's well received by the market or target constituents
• Creating a well-oiled network: Establishing iterative processes to optimize operations
• Scaling the business: Growing the business by effectively repeating the repeatable parts

To achieve successful growth and innovation, enterprises employ people, technology, and resources to perfect the business at every stage. When we talk about a business "that has scale built into the business design," we mean to imply a new approach that not only relies on employing people, technology, and resources, but also is inclusive of a co-creative approach, in which users, customers, and ecosystems become co-creators to create more value, growth, and innovation.

How do growth and innovation relate to a blockchain-powered network?

Let's attempt to link the value creation of a blockchain network to co-creation and platform thinking: as blockchain networks evolve and grow, and as new participants are added or removed, the dynamics of the network change and several bilateral and multilateral relationships emerge. Today, these relationships are largely driven by static smart contracts and do not capture the essence of blockchain-powered markets.

Now, let's define these two models:

• A platform thinking approach to building a business involves figuring out ways in which an external ecosystem of businesses, developers, and users can be leveraged to create value. Common examples include Twitter, Facebook, YouTube, and even Wikipedia.
• Co-creation is a concept that brings different parties together (for instance, a company and a group of customers) to jointly produce a mutually valued outcome. Co-creation brings the unique blend of ideas from direct customers or viewers (who are not the direct users of the product), which in turn gives a plethora of new ideas to the organization.

In a true, digitally driven marketplace, the blockchain-powered network ensures that dynamic marketplace relationships and interactions are reflected in a systemic and intelligent way. As we design blockchain networks for industries, we're seeing interesting new business models emerge, leading many organizations to rethink their current business models, the competition, and the overall market landscape.

We're beginning to see network design consist of participants with varied interests focused on a singularity of the assets at the nucleus of the blockchain-driven business network and ecosystem. All of this leads to new partnerships and co-creation. In essence, the blockchain-powered business network has the potential to amalgamate the platform thinking approach and co-creation to exponentially increase value creation in the business transaction network.

Considerations for evaluating the economic value of blockchain entities

How do we value various entities involved in building a blockchain-based business network? There are technology providers, business owners, participants, consortium operators, and many other niche players, ranging from token issuers to blockchain technology players and the business that is using these services to either transform an industry or disrupt it. The following aims to provide an evaluation framework for such an analysis:

• Business solution:
  • Problem domain: The business problem we are solving, the industry landscape, and evolution through innovation
  • Addressable market: The overall cost of the problem domain, that is, the cost of the problem itself and its economic impact on the industry segment
  • Regulatory and compliance landscape: The regulatory landscape that can help or impede the adoption of new technology-led business models
  • Competitive frameworks/alternatives: The other frameworks and entities trying to solve the issue with or without distributed ledger technology (DLT)/blockchain
• Technology design and architecture:
  • Consensus design: Leads to trust systems and economic viability of blockchain network
  • Blockchain components: Shared ledger, crypto elements, smart contracts, and trust system
  • Blockchain deployment infrastructure: Cloud, geo-specific deployment, technical talent (or access to it), SLAs, and so forth
• Monetization strategy:
  • Token-based model: Operation fees — write to the blockchain-powered business network's distributed database
  • Token as medium of exchange: Lend or sell the token as a "step-through" currency
  • Asset-pair trading: Monetizing margins
  • Commercialization of the protocol: Technology services, which include cloud, software lab, and consulting services
• The power of the network (also called network effect): Extrapolating the power of the network and the exponential power of co-creation models, leading to new business models and resulting economic value

Blockchain investment rubric

It is vital for an enterprise to establish an investment rubric as a control and finish risk mitigation technique. An investment rubric is a layered abstraction that represents the investment criteria and landscape. The rubric evaluation criteria have inputs, output, and continual analysis. The inputs are generally assumptions that drive the model, such as technology design, architecture, talent acquisition, compliance costs, cost efficiency versus new business opportunity models, and so on. The output, on the other hand, is the projected performance metric measured against stated input objectives. The investment rubric can also serve as a model, which can be used to evaluate multiple sets of performance metrics based on different assumptions.

This investment rubric is a guide and evaluation tool for blockchain projects. The continual assets of the rubric will enable us to define the merits of a potential investment and objectify the decision and justification of the investment. The rubric is a sort of financial modeling that employs various business valuation techniques such as the following:

• Net present value (NPV): A popular valuation technique used by the financial services industry to compare the delta of present value of cash inflow and cash outflow over a period of time.
• Benefit-cost ratio (BCR): The popular cost-benefit analysis, which defines the overall relationship between the costs employed on the project and the overall benefit to the business.
• Internal rate of return (IRR): In contrast to NPV, this valuation technique relies on calculating the profitability of the investment. This technique is used to determine the rate of return on the investment, as opposed to cash flow.
• Governance, risk management, and compliance (GRC): Analysis that provides a holistic investment and risk profile, which is not considered at the proof of concept phase—a stage with limited experimentation.

Devising the comprehensive investment profile and model is a significant step in communicating to investors, partners, and stakeholders the extent and depth of analysis with a clear defensible plan for project execution, deployment, and subsequent risk mitigation embedded at every layer of the rubric. The investment rubric can be used as an important tool for modeling and analysis with a feedback loop. It serves as a scoring guide of sorts to evaluate the intended investment objective and stated outcome. The idea behind this approach is to have a progressive development model that includes risk mitigation by continual tweaking models to achieve desired objectives. An effective rubric starts with proof points at early stages of technology experimentation and extends to more serious efforts around assessing business models and establishing a minimum viable ecosystem, while testing risks, ROI, and financial and governance models along the way. Used properly, a rubric provides new learning and incremental successes at every stage; it enables us to apply and tweak valuation and risk models, establish autonomic (sense and response) governance policies, and thereby grow and scale the blockchain-powered business ecosystem.

How does the enterprise view blockchain?

Radical openness is an aspect of blockchain as a digital trust web, but in the enterprise, it's vital to consider the impact and implications of radical openness.

A public blockchain can operate with extreme simplicity, supporting a highly distributed master list of all transactions, which is validated through a trust system supported by anonymous consensus. But can enterprises directly apply the model of the trustless system without modifying the fundamental tenets of blockchain?

Do organizations view this disruptive technology as a path to their transformation, or merely a vehicle to help them improvise their existing processes to take advantage of the efficiencies the trust system promises? No matter what, enterprises will want the adoption of blockchain to be as minimally disruptive to the incumbent system as it can be, and that won't be easy to achieve! After all, the design inefficiencies of the incumbent system are what have compelled the enterprise to consider this paradigm shift. A lot of the concepts and use cases for blockchain are still distant from enterprise consumption.

The first industry to experiment with and adopt blockchain was the financial services sector, as it has been facing down the fear of being disrupted by another wave of start-ups. Like many industries, it is also driven by consumer demands for faster, lower-cost transactions.

Financial services have a well-defined set of use cases, including trade financing, trade platforms, payment and remittance, smart contracts, crowd funding, data management and analytics, marketplace lending, and blockchain technology infrastructure. The uses for blockchain we've seen in this industry will likely permeate other areas like healthcare, retail, and government in the future.

Integrating a blockchain infrastructure for the whole enterprise

Any enterprise adoption of blockchain should have the goal of disrupting incumbent systems. Thinking about integration with enterprise systems of record is one way to work toward this. In this manner, an enterprise can implement blockchain-driven transaction processing and use its existing systems of record as an interface to its other applications, such as business intelligence, data analytics, regulatory interactions, and reporting.

It's vital to separate the infrastructure for enterprise blockchain technology from the business domain that uses chain technology to gain a competitive advantage. Blockchain can be seen as an enterprise chain infrastructure that's invisible to business, operating behind the scenes, while promoting interprise synergy between various business-driven chains. The idea is to separate the business domain from the technology that supports it. A chain application ought to be provisioned by a business domain that has a suitable trust system. The trust system, as I've stated repeatedly, is central to any blockchain endeavor; therefore, it should be appropriate to the needs of a given business application. The cost of the infrastructure and compute requirements will be dictated by the choice of trust system available to an enterprise.

By separating out the blockchain technology infrastructure, designing an architecture around a pluggable trust system, using trust intermediaries, and a design that promotes flexibility and a modular trust system, the business can focus on the business and regulatory requirements, such as AML, KYC, nonrepudiation, and so forth. The technology infrastructure for blockchain applications should be open, modular, and adaptable for any blockchain variant, thereby making the blockchain endeavor easy to manage.

Interprise synergy suggests driving synergies between numerous enterprise blockchains to enable inter- and intra-enterprise chain (interledger) connections. In this model, the transactions would cross the various trust systems, giving us visibility into the interactions of enterprise governance and control systems. Fractal visibility and the associated protection of enterprise data are important to consider when looking at these interactions between business units and external enterprises.

An invisible enterprise chain infrastructure, as illustrated in the following diagram, can provide a solid foundation to evolve enterprise connectors and expose APIs to make incumbent systems more chain aware. Interprise synergy will flourish due to conditional programmable contracts (smart contracts) between the business chains:

Figure 1.6: An interprise synergy enterprise chain infrastructure

How can an enterprise know if it is ready for blockchain? More importantly, when considering blockchain consumption, should its focus be on integration with incumbent transaction systems, or an enterprise-aware blockchain infrastructure?

To take full advantage of the promise of enterprise blockchain, an integrated enterprise will need more than one use case and will need to drive interprise synergy. The most successful blockchain consumption strategy should focus on technology initially and then consider integration with existing enterprise business systems. This will facilitate collective understanding and accelerate enterprise adoption of blockchain, hopefully on the path of least disruption, leading to seamless adoption of blockchain technology.