Lessons in Disruption from Fintech, Supply Chains, and Consumer Industries (Management on the Cutting Edge)

In today’s rapidly evolving Digital landscape, Blockchain technology has emerged as a disruptive force reshaping enterprise strategies worldwide. This transformative power promises unparalleled efficiency, security, and transparency. Amidst this technological revolution, embracing blockchain becomes not just a choice but a necessity for businesses seeking sustainable growth and competitive advantage.

Explore the dynamic world of blockchain-driven enterprise strategy and unlock the secrets to future-proofing your business. Dive deeper into the insights and strategies presented in [Enterprise Strategy for Blockchain] to stay ahead in the digital race.

Genres

Business, Technology, Strategy, Blockchain, Innovation, Digital Transformation, Finance, Cryptocurrency, Entrepreneurship, Management

“Enterprise Strategy for Blockchain” by Ravi Sarathy delves into the intricate nexus between blockchain technology and business strategy, offering a comprehensive roadmap for leveraging its potential. Through insightful analysis and real-world case studies, Sarathy elucidates how blockchain can revolutionize various facets of enterprise operations, from supply chain management to financial transactions. By demystifying complex concepts and highlighting actionable strategies, the book equips readers with the tools to navigate the evolving landscape of blockchain-driven innovation.

Review

Sarathy’s book serves as an indispensable guide for business leaders, entrepreneurs, and technologists seeking to harness the transformative power of blockchain. With its lucid explanations and practical insights, “Enterprise Strategy for Blockchain” not only demystifies the technology but also empowers readers to formulate robust strategies for success in the digital age. Whether you’re a seasoned industry professional or a newcomer to blockchain, this book offers invaluable perspectives and actionable recommendations for navigating the complexities of enterprise strategy in a blockchain-enabled world.

Recommendation

Blockchain could have numerous benefits for companies, the global economy and society at large, writes professor Ravi Sarathy, yet business leaders haven’t yet embraced the switch from legacy to blockchain systems. Enterprises must make a shift from hierarchical “winner-take-all” thinking to working collaboratively within blockchain ecosystems to fuel innovation and provide customer solutions. This useful book will help executives gain some important insights into how best to prepare for the disruption posed by Digital Currencies and blockchain.

Take-Aways

• Businesses have been slow to adopt blockchain technology, despite its many advantages.
• Blockchain provides organizations with effective solutions to persistent problems and risks.
• Optimizing scalability, security and decentralization presents complex challenges.
• Digital currencies could radically disrupt the global financial system.
• Enterprises can prepare for the impact of digital currencies through experimental pilot programs.
• The mass adoption of decentralized finance applications would challenge traditional banking.
• Firms improve customer solutions by working collaboratively within blockchain systems.
• Switch to blockchain with a strategic, four-step approach.

Summary

Businesses have been slow to adopt blockchain technology, despite its many advantages.

Blockchain could create meaningful solutions for global supply chains. It could ensure enhanced transparency and security while preventing issues such as unethical worker treatment and fraud. Blockchain technology would also make cross-border payments faster, more affordable and seamless, while blockchain-based verification would reduce the need for credit bureaus such as Equifax. Furthermore, blockchain networks are practically impossible to hack, as they use decentralized storage and advanced encryption. Blockchain’s value lies in its unique architecture and design. It deploys distributed ledger technology (DLT), the result of combining three different concepts: distributed peer-to-peer (P2P) networks, game theory-inspired incentives and robust cryptography.

“Upper management may be resistant to efforts to replace legacy systems with blockchain applications, due to their unproven nature, the paucity of significant positive results from blockchain usage among industry peers and the risks inherent in being pioneers.”

Yet the adoption of blockchain requires organizations to do things differently. Enterprises would need to collaborate more with independent entities, regulators, suppliers and even competitors to harness blockchain’s full potential. Senior management would have to approve new budgets to invest in blockchain, as its implementation requires human resources, time and capital. Many in leadership positions are reluctant to replace legacy solutions with blockchain, as doing so requires adopting an experimental, pioneering approach and the risks that come with it.

Blockchain provides organizations with effective solutions to persistent problems and risks.

Blockchain can help provide solutions for the following issues:

1. “Identity verification” — Blockchain uses public and private keys, as well as zero knowledge proofs (ZKPs) to create a decentralized identifier an individual can control, referred to as a “self-sovereign identity” (SSI).
2. “Trusting counterparties” — Firms struggle to trust that counterparties will pay them as promised. Blockchain uses methods such as proof of work (PoW) and proof of stake (PoS) to authenticate a validated block of transactions, while deploying consensus algorithms to bypass the need for trust.
3. “Provenance assurance and reliable transactions” — Blockchain can help firms prevent the altering of transaction activity records while ensuring record consistency, as it relies on a tamper-proof ledger.
4. Delays and disputes — When multiple parties are creating and storing records, inconsistencies can arise when duplicate records for the same transaction contain conflicting information. Blockchain solves this problem with an “immutable and tamper-resistant audit trail”; collective validation ensures that all parties receive the same information.
5. Integrating payments with transactions — Rather than waiting for payments from intermediaries such as banks, blockchain users can receive instant payments through the “tokenization” of value exchange via cryptocurrencies.
6. Protecting digital assets — Businesses and customers can safeguard digital assets with programmable tokens that attach contractual terms to assets like data through the use of smart contracts.
7. Risks of excessive centralization — Blockchain protects against the danger of a single or a select few nodes taking control over access, rules and fees of a platform. Blockchain uses decentralized nodes, preventing monopolization and increasing transparency.

Optimizing scalability, security and decentralization presents complex challenges.

Technological hurdles create obstacles for those hoping to leverage blockchain’s full potential. First, blockchain is a multilayered technology, and its core layer, which consists of the adopted protocol – for example, Ethereum – must be compatible with the features in its second layer, such as smart contracts. These features must interact with the software applications, including DApps and application programming interfaces (APIs) in the proxy layer. The blockchain must also function with off-chain elements like off-chain storage, and it must be responsive to external information sources and events. Firms with less capacity to manage their digital transformation may face human capital, financial and knowledge constraints when attempting to navigate all the complexities of adopting blockchain technology.

“As with many young, potentially disruptive, technologies, blockchain technology is hobbled by performance drawbacks that create obstacles for adoption at the enterprise level.”

Ethereum founder Vitalik Buterin explains that blockchain is facing a “scalability trilemma,” as it can’t simultaneously maximize scalability, security and decentralization — it can only optimize two out of three of these parameters at one time. For example, if you want to perform several transactions quickly, thereby increasing scalability, you may be hindered by decentralization. But if you increase centralization, you may reduce security. Companies are currently exploring technical solutions to the trilemma, some of which include increasing transaction speed without increasing centralization and diminishing security, by updating consensus mechanisms. They are attempting to validate transactions with support from permission networks that batch together smaller transactions into “sidechains” to decrease the computational burden. They are also improving processing speeds and boosting computational power by improving vertical scalability.

Digital currencies could radically disrupt the global financial system.

The switch to digital currencies is poised to have major geopolitical consequences. For example, a central bank digital currency (CBDC) could theoretically replace the US dollar as the global reserve currency. Citizens from countries with volatile economies and weak national currencies could also participate more in the global economy, gaining monetary independence through access to globally transacted stablecoins. Digital currency issuers must work with governments to take steps to prevent criminal activities, and the issuers must comply with policies to prevent tax evasion, corruption, money laundering and terrorism financing. If CBDCs replaced national currencies, governments could risk losing economic sovereignty. Some government agencies, such as the Bank of Canada, are preparing for these risks by launching pilot programs that use central banks as clearing agents for digital currencies.

“Digital currencies are a disruptive force that requires concerted collective action to prevent negative consequences from emerging.”

The entities developing private stablecoins — designed to reduce the volatility of digital currencies — may see a financial incentive in developing apps that enable as many people as possible to access these coins, perhaps creating a more inclusive banking system for those without banks and for those living in poverty. In Kenya, M-Pesa has added basic services such as savings accounts, loans and insurance to its digital currency services, making these services more accessible to the unbanked. Competitors will likely follow suit. Ultimately, the potential for digital currencies to disrupt the global financial system is massive and will require government agencies to take collective responsibility for the smooth functioning of the world’s economy.

Enterprises can prepare for the impact of digital currencies through experimental pilot programs.

Companies must navigate a number of strategic decisions regarding digital currency adoption:Firms must decide whether they plan to embrace digital currencies and if they want to do so while continuing to accept traditional forms of payment, such as credit cards. They must carefully consider the impact of digital currency adoption on their current banking arrangements – instantaneous settlement will impact float, or funds availability, in payables and receivables. And they should negotiate customer-data access terms with new digital money providers, perhaps working with industry associations to lobby for user data privacy protections within digital currency networks.

“Broader use of digital currencies, whether cryptocurrencies, private stablecoins or official CBDCs, would affect the entire global economy.”

Firms should take an experimental approach by adopting digital currency pilots that would bolster their knowledge of issues such as scalability barriers and implementation issues. Companies must gain an understanding of how best to position themselves within the emerging ecosystem of digital currency providers, such as Monerium, USDC and Tether, and digital currency exchange platforms like Coinbase. They should also familiarize themselves with blockchain protocol partners, such as Consensys Quorum or Algorand, to decide which best suits their purposes. Consensys Quorum is an open-source protocol layer that enables organizations to leverage Ethereum and choose product modules to customize their blockchain applications. Algorand aims to improve scalability in a decentralized manner, while validating transactions rapidly without compromising security, through the use of consensus validation and “the Algo,” its own native token.

The mass adoption of decentralized finance applications would challenge traditional banking.

Decentralized finance (DeFi) refers to the trend of leveraging blockchain and other technologies to create user-friendly solutions that compete with legacy systems. Blockchain-powered intermediaries can create bridges among investors, borrowers and entrepreneurs, meeting needs for trust and liquidity, while establishing provenance and furnishing immutable, accurate and timely data. All this would occur while significantly lowering intermediary fees charged by traditional financial institutions. DeFi protocols also have the advantage of interoperability, as they are typically open source and rely on a common software infrastructure.

“DeFi applications may be the ones that finally persuade enterprises of the viability of using blockchain for their own internal and external applications.”

DeFi is poised to grow via an influx of new P2P money applications. As of October 2021, Ethereum DeFi applications were valued at nearly $160 billion. New DeFi firms such as Balancer act as automated market makers, enabling users to engage in a range of financial activities related to decentralized exchange, such as investing digital currencies in futures markets and margin trading. The DeFi application Maker and its stablecoin DAI have triggered significant adoption of cryptocurrencies, inspiring users to convert volatile cryptocurrencies into a more stable form of digital currency. However, DAI experienced some instability during the COVID-19 pandemic and failed to maintain parity with the US dollar. Building DeFi applications on CBDCs would help make DeFi more appealing to the mass market by reducing the perception of volatility.

Firms improve customer solutions by working collaboratively within blockchain systems.

Blockchain’s applications span three sectors: digital payments and currency, DeFi applications, and global trade finance and supply chains. Enterprises working within these sectors should be sharing information, establishing trust and collaborating to serve the consumer’s best interests. When blockchain nodes are distributed across several firms, enterprises can work together within an ecosystem to collaborate in developing blockchain-based user solutions. The ecosystem approach differs from a platform-based approach, in which a single firm can leverage network effects to dominate an entire platform through a “winner-take-all” approach.

“The ecosystem mode of organization runs contrary to well-established, hierarchically controlled organizations.”

Supply chain platform TradeLens [discontinued], controlled by IBM and Maersk, uses an ecosystem approach to implement supply chain solutions, connecting a wide-range of supply chain actors, like shipping firms and customs agencies, to a “single source of truth” via blockchain. TradeLens nurtures a system in which multiple parties can benefit: Supply chain providers and customers get valuable knowledge about details such as shipment location and possible delays, and IBM and Maersk reward innovation, encouraging entities to integrate internet-of-things (IoT) devices with AI capabilities and software to track shipments. TradeLens demonstrates the importance of transparency that allows firms to monitor the distribution of value themselves.

Switch to blockchain with a strategic, four-step approach.

If your firm is contemplating adopting blockchain, use this four-step approach to determine the best path forward:

1. Assess legacy systems — Do your current systems have any drawbacks or problems that need resolution?
2. Assess the potential of blockchain solutions — Create your business case for any blockchain solutions you’d like to adopt, reflecting on whether you want to replace legacy systems entirely or harness both legacy and blockchain solutions.
3. Design solutions — Identify the most relevant blockchain features for your purposes and choose protocols.Decide how you want to approach tokenization and strategically position your firm within an ecosystem.
4. Prepare your organization — Aspire to win strong sponsorship among your leadership. Take time to conduct a cost-benefit analysis, assess risks and create new business models. Make sure you have the human capital and knowledge base needed to make the switch, and ensure regulatory compliance. If you’ve already experimented with different blockchain pilots, you’ll be better equipped to choose winning blockchain solutions.

About the Author

Ravi Sarathy is a professor at Northeastern University. He is also the co-editor of Firms within Families: Enterprising in Diverse Country Contexts.

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