Blockchain
Blockchain for Grown-Ups: The Multiverse is Coming
Distributed Ledger Technologies (DLTs) are a superset of blockchain technologies built on similar fundamental concepts. While much has been written on the technical foundation that both blockchain and DLT are built upon, the real potential lies in the possible benefits they can deliver to stakeholders.
A DLT or Blockchain platform can have either a public or a private network. A private network will have tiered access, whereas, on a public network the shared ledger is available to all counterparties.
Private networks have attracted the most interest within the financial services industry. By the end of 2017, $1.6 billion had been invested in DLT initiatives ranging from small businesses to cross-industry consortia . A number of use cases are being trialed using DLT as the underlying platform, some with a potential to redefine business ecosystems such as Digital Supply Chain and International Payments.
Given the increased level of investment and increasing maturity of core underlying technology, mainstream offerings are just around the corner. Businesses will need to assess if a DLT strategy is necessary to ensure their continued competitive participation in their own industry.
A good place to start looking for potential industry use cases would be to examine sources of complexity within the current value chain.
Industries must avoid the temptation to replicate their current systems onto DLT. Businesses need to take a holistic view, identifying specific sources of complexity using techniques such as value stream mapping, to reimagine the structure of industry processes.
International Payments is a great example of using DLT to solve long-standing issues. The current process is complicated, time-consuming, and costly. In the current model, a transaction is sent through multiple intermediaries resulting in high operational costs, transaction times of 3-5 days and trapped liquidity. The end customer experiences lack of transparency, hidden costs, and high foreign exchange spread.
A major cause for the challenges in the current model is the number of trust intermediaries within the process. There are a number of ways in which the solution can be reimagined, with each one removing all or a number of intermediaries. This could be achieved by using cryptocurrency on the network (Scenario 1) such as XRP.
A second option is to use central bank issued currency (Scenario 2), which is being trialed in a number of countries including Tunisia, Estonia, Canada, and Singapore.
A third option is to use tokenized fiat currency (Scenario 3) to make payments such as Utility Settlement Coins.
These new payments processes can further pave the way for innovative trade finance solutions. Similar approaches on other such archaic processes can help us create new business and commercial models.
However, as with any new model, the consortium approach is not without its challenges:
Collaboration: In order to be effective many DLT solutions must be industry-wide, and as such require global collaboration. This is a major barrier to change as the temptation for businesses to work on their own internal projects and protect the IP wins out. Businesses must get over the fear of not all parties contributing equally if the industry as a whole is to reap the rewards
Hedging: Financial institutions often hedge their bets, ‘supporting’ multiple DLT projects, without a strong commitment from the business. While hedging allows them to explore multiple solutions, this can become a catch-22 situation as innovation withers without commitment.
Wider stakeholder involvement: Change is required not just with participant institutions, but also with other bodies such as regulators, standards, and service providers. Involving them early in the process can help iron out teething problems.
Disruptive technologies have afforded us the opportunity to revisit old assumptions and pain points. A technology only lens constrains the solutions to shoehorning capabilities on existing structure and processes. The true power of a disruptive technology like DLT lies in re-imagining the value chain in an increasingly digital world.
A DLT or Blockchain platform can have either a public or a private network. A private network will have tiered access, whereas, on a public network the shared ledger is available to all counterparties.
Private networks have attracted the most interest within the financial services industry. By the end of 2017, $1.6 billion had been invested in DLT initiatives ranging from small businesses to cross-industry consortia . A number of use cases are being trialed using DLT as the underlying platform, some with a potential to redefine business ecosystems such as Digital Supply Chain and International Payments.
Given the increased level of investment and increasing maturity of core underlying technology, mainstream offerings are just around the corner. Businesses will need to assess if a DLT strategy is necessary to ensure their continued competitive participation in their own industry.
A good place to start looking for potential industry use cases would be to examine sources of complexity within the current value chain.
Industries must avoid the temptation to replicate their current systems onto DLT. Businesses need to take a holistic view, identifying specific sources of complexity using techniques such as value stream mapping, to reimagine the structure of industry processes.
International Payments is a great example of using DLT to solve long-standing issues. The current process is complicated, time-consuming, and costly. In the current model, a transaction is sent through multiple intermediaries resulting in high operational costs, transaction times of 3-5 days and trapped liquidity. The end customer experiences lack of transparency, hidden costs, and high foreign exchange spread.
A major cause for the challenges in the current model is the number of trust intermediaries within the process. There are a number of ways in which the solution can be reimagined, with each one removing all or a number of intermediaries. This could be achieved by using cryptocurrency on the network (Scenario 1) such as XRP.
A second option is to use central bank issued currency (Scenario 2), which is being trialed in a number of countries including Tunisia, Estonia, Canada, and Singapore.
A third option is to use tokenized fiat currency (Scenario 3) to make payments such as Utility Settlement Coins.
These new payments processes can further pave the way for innovative trade finance solutions. Similar approaches on other such archaic processes can help us create new business and commercial models.
However, as with any new model, the consortium approach is not without its challenges:
Collaboration: In order to be effective many DLT solutions must be industry-wide, and as such require global collaboration. This is a major barrier to change as the temptation for businesses to work on their own internal projects and protect the IP wins out. Businesses must get over the fear of not all parties contributing equally if the industry as a whole is to reap the rewards
Hedging: Financial institutions often hedge their bets, ‘supporting’ multiple DLT projects, without a strong commitment from the business. While hedging allows them to explore multiple solutions, this can become a catch-22 situation as innovation withers without commitment.
Wider stakeholder involvement: Change is required not just with participant institutions, but also with other bodies such as regulators, standards, and service providers. Involving them early in the process can help iron out teething problems.
Disruptive technologies have afforded us the opportunity to revisit old assumptions and pain points. A technology only lens constrains the solutions to shoehorning capabilities on existing structure and processes. The true power of a disruptive technology like DLT lies in re-imagining the value chain in an increasingly digital world.
Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.
