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Tapping into the Strategic Opportunities of Blockchain

Blockchain technology is a distributed digital database that enables participants to share data and make transactions without an intermediary or direction from a central party. Some companies are embracing it while others have yet to wade in. But it’s becoming a competitive advantage and an emerging standard for exchanging data and value across participants. BCG has vast experience helping clients define their strategy around blockchain.

Far More than Cryptocurrency

The first and most famous use of blockchain technology was to create and administer digital or virtual “coins” such as bitcoin and digital tokens or cryptocurrencies. These were typically devised for use as a transaction medium and store of value. 

But the four basic elements of a blockchain solution have a far broader set of applications. These elements are: 

  • A distributed ledger and peer-to-peer network, in which network nodes ensure resiliency and transparency 
  • Digital signatures and hash functions that prevent data tampering through encryption and a chain of hashed (or indexed) data 
  • Algorithms that ensure the validity of transactions through consensus among network participants 
  • Smart contracts that are automatically executed based on validated triggers.

What Blockchain Is Not

A blockchain, by contrast, is a distributed database that can include embedded functionality to automate transactions—that is, smart contracts. Its benefits are predicated on mass adoption of the data it stores and manages across an industry, or across multiple industries. 

The broad scope requires that data models and processes be standardized to a greater degree than an enterprise context would demand. And the potential of blockchain technology is vastly greater as well. 

Unique opportunities can still by captured by companies that move now to harness the power of blockchain technology to create new business models and gain a competitive advantage.

No Longer a Novelty

Clearly, blockchain development is no longer a novelty. It’s not even just a helpful but limited tool for recording and synchronizing electronic transactions. More and more, industries are finding strategic uses for blockchain. Its applications and required business models are becoming clearer. 

Participating in an ecosystem based on highly standardized digital processes—and imperative for blockchain and other shared databases—gives users access to a shared repository of information providing full traceability across the value chain: something that can enhance almost any function. Blockchain technology is an ideal tool for managing records, processing transactions, tracing assets, and voting. 

In supply chain management, for example, this means blockchain solutions can deliver: 

  • transparency across multiple parties
  • proof of ownership and origin of goods 
  • quality management 
  • secure, reliable tracking linking physical and digital identity of goods.

In identity management, blockchain solutions can: 

  • capture personal identity securely
  • protect and share health records 
  • record and track popular votes. 

In trade finance, distributed ledgers built on blockchain technology can reduce duplicate and fraudulent documentation by: 

  • validating ownership 
  • certifying transactions 
  • making payments. 

As blockchain solutions mature, companies are developing a better understanding of which functions can benefit most from blockchain solutions. They are also becoming more adept at applying these solutions to specific use cases. Along the way, they can gain insight on how these technologies can add security and efficiency to a wider range of processes and interactions.

The Network Effects Growth Model

But focusing solely on cost savings and efficiencies understates the disruptive potential of blockchain technology. Like the telephone, the internet, and the smartphone in earlier years, blockchain today creates a network whose value grows exponentially as more people use it: the phenomenon BCG calls the “network effects growth model.” 

As an illustration, consider the exponential growth of internet usage and how it enabled the success of Google and Amazon. Or, more recently, consider how the rapid adoption of smartphones has enabled services like Uber to become ubiquitous. Blockchain technology can represent the underpinning technology platform for similar platform plays.

Furthermore, as blockchain technology matures, applications will emerge across not just one or two industries but a multitude. For example, by providing a new level of transparency and a greater capacity to sharedata, blockchain technology disrupts intermediaries that have historically benefited from data consolidation and arbitrage. This disruption affords advantages to any industry, from health care to the public sector.

A New Automated Ecosystem

What makes blockchain technology powerful is not the mechanism itself but the fact that the technology affords industries the ability to share data and processes that have no before been shareable. Each blockchain network does this by bringing together a platform owner, suppliers, and customers in a new "automated" ecosystem. 

Each ecosystem starts with a vision of a marketplace platform for a product or group of products or services. The goal of that marketplace is to minimize friction and chokepoints and to accommodate each player’s needs, enabling sellers to better monetize their product and purchasers to get the best price and the best deal. 

Examples of ecosystems that predate blockchain include the SWIFT payment system for banks and the online retail offerings of companies like Amazon.com and Alibaba for online retail. The advent of blockchain, however, makes it is far easier and much cheaper to establish and run such an ecosystem.

Whether they operate within an industry-specific or a cross-industry data-sharing ecosystem, companies must be clear about what role they want to play. Through client work, BCG has identified the following four basic roles in an ecosystem: industry utility; platform provider; supplier (making and selling a product using the network); and product purchaser. 

As with any market ecosystem, the platform provider can choose how open or closed the environment will be: a completely open network that anyone can join, a private network for which the platform provider acts as gatekeeper, or a consortium in which players share decision-making. 

Strategic Opportunities of Blockchain

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