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Business of Business Models
Blockchain inspires new trusted business models with a disruptive combination of distributed organizational structure and decentralized ecosystem.
—Nitin Gaur
Understanding and subsequently adopting blockchain poses a challenge for enterprises. The challenges range from identifying use cases to forging a path to production, and all the maneuvering in between, while simultaneously bridging the decision gaps. In the face of these critical tasks, it is important that we establish a methodology that provides a broader level of understanding about the line of business (LOB) on the blockchain journey and ensures a path that is economically viable, with a defined and well-understood return on investment (ROI).
Path to Blockchain Enterprise Adoption: A Prescriptive Approach
There is a general and accepted understanding that in many cases blockchain technology might radically alter the process through which an enterprise interacts and the way (financial) institutions process transactions. Specifically, the application of technology can remove cost and friction from the process, create transaction records that are immutable, and facilitate near-instantaneous updates of transparent ledgers with near real-time finality. It also can dramatically change the design of the existing processes inside of an enterprise.
Implementation of blockchain for targeted use cases that encompass transaction processing is intended to reduce operational costs and open up new business opportunities that rely on the “network effect” of bringing multiple participants under the same blockchain umbrella. Potential benefits from such cooperation include sharing of the costs of risk profiling and analysis and the approval process, mitigation of systemic risk, and rewards for participating enterprises. With many blockchains, the notion of cost optimization is due to shared costs of many components, which is fundamentally enabled by flattening the existing business process at the network level. In this way, participants broaden their scope, unlock individual enterprise business processes, and open flattened network-wide business processing. This mind-set, however, requires a radical shift in planning and devising a business model.
To give structure to this planning paradigm, we need a device methodology. The prescribed methodology proposes a four-step process that enables an enterprise to channel its resources judiciously, mitigate risk at every level, and ensure that the work product at every step of the way can be functionally applied to a collective decision-making process. The four steps are as follows:
Identify an appropriate use case.
Devise a business blueprint by distilling the existing business process.
Map the business blueprint to technology tenets—that is, devise a technology blueprint.
Ensure enterprise integration with (legacy) enterprise systems.
The core and fundamental thinking behind this approach is to enable a business-driven focus and ensure that the correct acumen is applied to the right set of key performance indicators (KPIs) to measure the success of the project and achieve the intended results. We take a singular use case that has impacts on the industry and enterprise, and we apply business and technology acumen to the problem domain. The use-case selection process tests the resolve and commitment of LOB owners. The result is a well-thought-out business architecture and technology blueprint with requirements for compliance, audit, and enterprise integration.
Let us go into detail into each of these steps, which are summarized visually in Figure 4.1.
1. Identify an Appropriate Use Case
We should expend a significant amount of time and effort at this stage to ensure that the use case that we pick has two sets of characteristics:
Enterprise impact: The use case that is destined for blockchain adoption after it passes the blockchain tenets tests (trade, trust, ownership, and transactionality) addresses enterprise time and trust issues, which results in significant cost savings, and addresses time and trust imperatives that manifest as redundant systems and processes. This step helps justify costs, investment in the blockchain project, and overall ROI—a language that business understands.
Industry impact: Blockchain promises to create a network of value, which implies an interconnected set of networks that help transfer things of value with relative ease and at significantly lower cost due to the implied trust in the system, which eliminates the need for trust intermediaries. Thus, the use case that is picked should address industry-wide issues—that is, the enterprise cohorts should have a similar set of issues. Some examples include capital market interactions between lenders and borrowers, corporate actions, and others.
The Idea
The effort of selecting meaningful issues should revolve around addressing significant costs to enterprise and industry. This rationale helps justify costs if the investment at the enterprise level is only to use a “network effect” as industry adopts blockchain as a trust platform.
2. Devise a Business Blueprint: Distilling an Existing Business Process
Next, we apply a design-thinking approach, where the idea is to distill the existing business process into a blockchain-based transaction model. In this step, the idea is to elucidate all aspects of the existing business process, including its compliance requirements and dependencies on external systems. Furthermore, as we progress in this step, the existing business process is distilled down to the blockchain-based model, which espouses characteristics such as provenance, immutability, flat ledgers, and smart contracts that govern the validation and distribution of the ledgers.
This step is important because the work products generated in this stage lead into the technology design and blueprint. This process defines technical elements, such as the block data format, consensus, structure, and governance of (chain code) smart contracts (essentially the design of the interactions between various enterprise entities and external entities in the future, as industry aims for a network effect), as well as the trust and governance models.
The Idea
Blockchain promises to create a network of value that leads to a concept of the business network. Thus, it is important to understand interaction patterns, inefficiencies, and vulnerabilities, and to develop blockchain models to address those factors. After all, we are reinventing the business based on a trust system.
3. Map the Business Blueprint to Technology Tenets: Devising a Technology Blueprint
The work product from devising a business blueprint feeds into the development of a technology blueprint. This plan aids in making the many necessary technology decisions, such as (among others) the choice of the blockchain data model; consensus, audit, and logging requirements; deployment models; transaction requirements; data visibility; and overall systemic security, including authentication and authorization.
This is a progressive step, which implies that the more time and acumen an enterprise expends on earlier steps devising a blockchain technology blueprint, the more likely the exercise is to yield an accurate and precise deployment model. At this stage, critical and long-lasting technology decisions are made, such as the block data format (which is compatible with the downstream system, or it might need transformation for integration), consensus (based on the interactions with both internal and external systems), fractal visibility of data (based on various business interactions and rules), integration with existing security systems, and the technology stack and deployment (cloud, on-premises, or hybrid), which is an operational concern and significant cost consideration.
The Idea
For technology to align with business imperatives, we must ensure that we are making the correct technology and architecture choices to address the business requirements—such as transactions per second (TPS), technical service level agreements (SLAs), enterprise integration, external system integration, and regulatory and compliance requirements—that make blockchain function in an enterprise. These considerations also require technical due diligence to clarify the blockchain project’s budget and mitigate its risks.
4. Ensure Enterprise Integration with (Legacy) Enterprise Systems
We also should consider adjunct enterprise systems that require enterprise integration for blockchain applications for operational considerations. The idea is to verify the presence of the key elements of trade, trust, and ownership, and the inherent properties of blockchain, such as immutability, provenance, and consensus. The resulting trust system should ideally help eliminate redundant and duplicative systems and processes. These duplicative systems require the use of significant resources, leading to delayed transaction processing and associated opportunity costs.
Our goal should be to address the fundamental pain point of the existing process, leading to a flat and transparent ledger that aims to address the element of trust and time, produce significant cost savings, and support better client service.
The Idea
Enterprise integration, especially with an adjacent system, is an important consideration and a cost point. It is both a business consideration and a technology consideration due to the presence of downstream transaction systems, which rely on critical business systems. In many cases, the adjacent system integration has a significant cost impact on the blockchain project. Thus, if this integration is not taken into account early in the planning stages, it can impose a sometimes tricky challenge on enterprise adoption.
Business Modeling and Design
A good blockchain network design encompasses various participants with varied interests who are focused on a singularity of assets and things of value at the nucleus of the blockchain-driven business network and ecosystem, which leads to new partnerships and co-creation synergies. Spending adequate time on devising the correct blockchain business model is essential for blockchain business network success and growth. Indeed, an appropriate business design is an important consideration for blockchain projects beyond the proof of concept (POC) phase. This design considers the various candidate blockchain business models: After the list of potential use cases is narrowed and a use case is finally chosen, the next step is defining the business structure to account for business transformation and disruption.
In the previous section, we described a prescriptive approach that starts with appropriate use case identification and defines a business blueprint before engaging in POC experiments and deeper technology-driven exercises, such as mapping the correct technology and making design decisions that lead to economically viable solutions. To date, the blockchain technical community, the entrepreneurial community, and the industry that aspire to transform and protect against disruptive forces have expended much of their energy on technology design, debating the correct technology approach, correct data structure, consensus models, and overall deployment choices. By comparison, less attention has been paid to the overall business design that will be the foundation of the blockchain networks and ecosystems.
Essentially, many industries seem to be looking at blockchain as a technology platform that will either transform the industry (by improving cost-efficiency, compliance costs, transparency, and so on) or disrupt it (through disintermediation, creation of new intermediaries, co-creation models, and so on). In either case, blockchain is a network of participants that form the ecosystem and coordinated decision-making process to achieve transaction finality and to facilitate a platform that fosters co-creation between the network participants. As blockchain networks evolve and grow, and as new participants are added or removed, the dynamics of the network will undoubtedly change, and bilateral and multilateral relationships may emerge. These changes are largely driven by static bilateral or multilateral engagements that are enforced by chaincode or smart contracts.
Besides addressing the notion of trust with blockchain technology constructs, such as immutability, cryptography, distributed databases, and smart contracts, network design considerations must include and encapsulate industry-specific interaction models. That is, not every interaction is bilateral or multilateral—some are organic variants that react to market conditions. Models for blockchain growth and evolution must incorporate a notion of network governance, onboarding, offboarding, costs of ensuring integrity and transaction SLAs, managing technology costs, and the upkeep and ongoing costs of the network.
The governance of blockchain networks includes various incentive economic models that center on compliance costs and the delegation of fiduciary responses in a multiparty network. Development of a business model that ensures the longevity of the blockchain solution is as important as technology acumen and business design considerations. Thus, enterprises must consider the business of blockchain business models before jumping into the fray.
Business Model Considerations
Blockchain business model considerations include the following:
Cost and risk
Enterprise core competencies and roles in the ecosystem
Avenues for new business growth due to co-creation elements
Transformation (enterprise) and disruption (industry)
Competition versus cooperation
The blockchain industry (business and technology drivers) has witnessed the divide between the permissionless (or public ledger) world, which refuses to adhere to any conventions and continues to forge ahead with many innovations that disrupt many industries with new business designs (such as initial coin offerings [ICOs], security token offerings [STOs], and stable coins), and conventional industries, which may adopt the technology in a quest to either transform the industry or to mitigate disruption. In either case, the business of blockchain networks needs an economic model to thrive.
The disruptive (permissionless) worlds are attracting technology investments, talent, and market synergies through the lure of incentive economics. For example, most ICOs (regardless of the distinction between securities versus utility tokens) rely on tokenomics, which describes the economic system of value generation in the network. Essentially, a system or network creates a unit of value either by creating a platform for providers and consumers or by co-creating a value network that is self-governing in its business model and empowers various entities to use the network to their advantage by facilitating the creation, distribution, and sharing of rewards benefiting all stakeholders.
For their part, the permissioned networks must discover the correct incentive and economic model for enterprises and organizations to join a platform that uses the notion of creation, distribution, and sharing of rewards that benefit all stakeholders. Although not all conventional business and industries can adopt the economic incentives of tokenomics (due to product catalogs, legacy systems, regulation, or lack of will among the potential participants), it is imperative that industries start the journey to explore the correct business model that would support value creation and escalate the modernization efforts that many industries desperately need to combat disruptive forces.
Here are a few thoughts on blockchain business models:
Business models are an important consideration because the correct business model dictates the technology design and platform choices to seed the network and the robust design that is needed for growth.
Business model design also provides a platform for business negotiation, contracting vehicles, and other business activities, such as procurement, shared services, legal services, and administration. Likewise, it clearly separates blockchain network business from business and 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 that is driven by the economic and financial structure of the business network, which is itself powered by the tenets of blockchain technology.
A well-crafted business design restores balance and facilitates smooth interactions between the various entities that compete with some network participants, and it justifies the need to cooperate and co-create with some other network participants. The co-creation element of a blockchain network is essential for sustained longevity and growth of the businesses in the blockchain network.
A blockchain business network also can be a business. A platform that facilitates co-creation and new synergies must be managed and operated with defined SLAs and have a robust governance structure that attracts new participants and sustains the confidence and business benefits enjoyed by its founders and existing participants.
Figure 4.2 illustrates four types of business models for blockchain networks.
Various business models that are being considered for permissioned or industry-specific blockchain networks include the following:
Joint venture
Consortium
NewCo
Business ecosystem
Build–own–operate (BOO) or founder-led networks
Build–own–operate–transfer (BOOT) or founding consortium–led network
Joint Venture
A joint venture (JV) is an entity formed between two or more parties to undertake and operate an economic activity together. In a JV structure, two or more parties agree to create a legal business entity, may fund it with equity contributions and other sources of investment, and share the revenues, operating expenses, and operational control of the enterprise.
Advantages: Ability for companies to gain new expertise, markets, and a disjointed advantage to grow and share a risk model with like-minded businesses.
Disadvantages: The possibility of inequality of skills, investment, and so on, between companies, leading to operational imbalance and difficult decision making.
Blockchain technology choices and impact: A semi-decentralized network that includes some aspects of centralization (the transaction processing can be decentralized). Governance of the business lies with the JV, which can be an impediment for some market players due to perceived competition.
Consortium
A consortium is typically an industry-specific association of two or more organizations with the objective of participating in an industry-specific business or a common activity to achieve a common goal and capitalize on the synergy between industrial players. In a consortium, each participant retains its individual legal status. Collectively, the members may create a consortium governing body to manage the consortium’s activities, bylaws, and engagements, and are often joined by various contractual vehicles.
Advantages: Flexible contractual terms that can be altered as the industry evolves. Business advantages of taxation, regulatory adherence, and development of an industry voice for self-governance.
Disadvantages: Issues of liability and nonperformance.
Blockchain technology choices and impact: Semi-decentralized/fully decentralized network. Included are some aspects of centralization, and the transaction processing can be decentralized. Governance can be decentralized by imposing self-governance rules or adopting a consensus mechanism for governance and a flexible technology design because governance structures can evolve. Industry-specific models may evolve, along with singularity regarding products, services, industry norms, and regulatory requirements.
NewCo
NewCo is a generic name for a proposed spin-off from an enterprise, consortium, or subsidiary before a formal name is chosen. A NewCo may be a new legal entity or a combined entity formed by existing entities.
Advantages: The ability for companies to gain new expertise, markets, a disjointed advantage to grow, and limited risk and exposure for the parent company.
Disadvantages: Possibility of a lack of skills, investment, and support structure.
Blockchain technology choices and impact: A semi-decentralized network or, in some cases, a centralized network that disregards the core tenets of blockchain and that uses piecemeal advantages of the technology. This model includes some aspects of centralization, and the transaction processing can be decentralized. Governance of the business lies with the NewCo, which can be an impediment for some market players due to perceived competition.
Business Ecosystem
A typical business ecosystem flourishes by combining a platform-thinking approach with a model that includes the networks of existing organizations; these organizations seek to capitalize on new business opportunities by creating an environment that facilitates co-creation and combines business models to introduce a unique value proposition for the customer. An example is a marketplace that includes suppliers, distributors, customers, competitors, government entities, and adjacent linked industries to deliver a unique value proposition through both cooperating and competing.
Advantages: Flexible contractual terms that can be altered as the industry evolves. Business advantages of taxation, regulatory adherence, and development of an industry voice for self-governance.
Disadvantages: Issue of liability, accountability, likability, and nonperformance.
Blockchain technology choices and impact: Can be designed as a fully decentralized network. Governance of the business ecosystem can be decentralized by imposing self-governance rules or adopting a consensus mechanism for governance. A flexible technology design enables the governance structure to evolve. Operations, SLAs, and overall platform management must have a centralized undertaking.
Build–Own–Operate or Founder-Led Networks
The BOO model is usually adopted by a public–private partnership in which the private entity builds, owns, and operates a structure or a facility, and public entities may provide assistance in the form of tax incentives, licensing and governance, and other supports. These models can vary in the permissioned world, where a founder or an industry leader can build, own, and operate the network and shape the industry to its advantage.
Advantages: The founding entity gets the benefit of established industry leadership and the residual value of the network, including revenue streams and adjacent business models.
Disadvantages: Potential requirement for significant investment in top talent, capital, and enterprise support resources to garner senior executives and internal business ecosystem support.
Blockchain technology choices and impact: A semi-decentralized network or, in some cases, a centralized network, which disregards the core tenets of blockchain and uses piecemeal advantages of technology. This model includes some aspects of centralization, and transaction processing can be decentralized. Governance of the business lies with network operations that are managed by the founder, which can be an impediment for some market players due to perceived competition.
Build–Own–Operate–Transfer or Founding Consortium–Led Network
BOOT is a type of business structure, rather than a form of financing. In this model, an entity usually receives concessions or funding (either private or public) to design, construct, own, and operate the project, which is either a facility or a business network, for a purpose that is outlined in a series of business and concession contracts. The facility or network is then transferred to a different entity, and the founding entity can use a bidding process to leverage the business value of operating the facility or business network.
Advantages: Development of avenues of investment due to the business value of transfer potential. Flexible models as the industry evolves.
Disadvantages: The blockchain network and adjacent services are the business model itself. This approach can carry high risks due to maturity issues and the adoption of technology and business design.
Blockchain technology choices and impact: A semi-decentralized network or. in some cases. a centralized network, which disregards the core tenets of blockchain and uses piecemeal advantages of technology. This model includes some aspects of centralization, and transaction processing can be decentralized. Governance of the business lies with network operations that are managed by the founder, which can be an impediment for some market players due to perceived competition.
Table 4.1 describes the various types of business models’ value matrix for blockchain networks.
Table 4.1 Business Models’ Value Matrix for Blockchain Networks
Business Model |
Advantages |
Disadvantages |
Blockchain Technology Choices and Impact |
Joint venture |
Ability for companies to gain new expertise and new markets; a disjointed advantage to grow and share a risk model with like-minded businesses. |
Possible inequality of skills, investment, and others between companies, which leads to operational imbalance and difficult decision making. |
A semi-decentralized network that includes some aspects of centralization, with decentralized transaction processing. Governance of the business lies with the joint venture, which can be an impediment for some market players due to perceived competition. |
Consortium |
Flexible contractual terms that can be altered as the industry evolves. Business advantages of taxation, regulatory adherence, and development of an industry voice for self-governance. |
Issues of liability and nonperformance. |
Semi-decentralized/fully decentralized network. The model includes some aspects of centralization, and transaction processing can be decentralized. Governance can be decentralized by imposing self-governance rules or adopting a consensus mechanism for governance and a flexible technology design, reflecting the potential for governance structures to evolve. Industry-specific models and singularity regarding products, services, industry norms, and regulatory requirements. |
NewCo |
The ability for companies to gain new expertise and markets, a disjointed advantage to grow, and limited risk and exposure for the parent company. |
Possible lack of skills, investment, and support structure. |
A semi-decentralized network or, in some cases, a centralized network, which disregards the core tenets of blockchain and uses piecemeal advantages of technology. The model includes some aspects of centralization, and transaction processing can be decentralized. Governance of the business lies with the NewCo, which can be an impediment for some market players due to perceived competition. |
Business ecosystem |
Flexible contractual terms that can be altered as the industry evolves. Business advantages of taxation, regulatory adherence, and development of an industry voice for self-governance. |
Issue of liability, accountability, likability, and nonperformance. |
A fully decentralized network. Governance can be decentralized by imposing self-governance rules or adopting a consensus mechanism for governance. A flexible technology design enables the governance structure to evolve. Operations, SLAs, and overall platform management must have a centralized undertaking. |
Build–own–operate (BOO) or founder-led networks |
The founding entity gets the benefit of an established industry leadership and the residual value of the network, including revenue streams and adjacent business models. |
Might require significant investment in top talent, capital, and enterprise support resources to garner senior executives and internal business ecosystem support. |
A semi-decentralized network or, in some cases, a centralized network, which disregards the core tenets of blockchain and uses piecemeal advantages of technology. The model includes some aspects of centralization, and transaction processing can be decentralized. Governance of the business lies with network operations that are managed by the founder, which can be an impediment for some market players due to perceived competition. |
Build–own–operate– transfer (BOOT) or founding consortium–led network |
Development of avenues of investment due to the business value of transfer potential. Flexible models as the industry evolves. |
The blockchain network and adjacent services are the business model itself. Can carry high risks due to maturity issues and the adoption of technology and business design. |
A semi-decentralized network or, in some cases, a centralized network, which disregards the core tenets of blockchain and uses piecemeal advantages of technology. Includes some aspects of centralization, and transaction processing can be decentralized. Governance of the business lies with network operations that are managed by the founder, which can be an impediment for some market players due to perceived competition. |
Chapter Summary
When defining the path to blockchain enterprise adoption, key considerations are maintaining a narrow focus on a singular use case and distilling the existing business into a blockchain paradigm, which implies the development of both business and technology models. Specifically, we must identify a singular use case that has both industry and enterprise impacts and apply business and technology acumen to the problem domain. The result should be a well-thought-out business architecture and technology blueprint, along with requirements for compliance, audit, and enterprise integration. The point of this exercise is to devote your time and energy, in combination with the right business domain expertise and blockchain technology expertise, to derive an adoption model that unearths and solves hurdles, challenges, and problematic factors affecting the costs and economic viability of the proposed blockchain solution. The resulting artifacts and collateral of the blockchain garage engagement are instrumental in socialization and in providing a blueprint for a business seeking executive sponsorship and the necessary funding for its first blockchain project.
But this exercise is not always enough: The permissioned network also might have to embark on a journey to uncover the correct incentive and economic model that will persuade enterprises to join a platform based on the notion of creation, distribution, and sharing of rewards benefiting all stakeholders.
Although not all conventional businesses and industries can blindly adopt the economic incentives of tokenomics, it is imperative that industries start the journey to explore the correct business model that will enable value creation and escalate the modernization efforts that many of today’s industries desperately need to combat disruptive forces. The governance of blockchain networks includes various incentive economic models based on compliance costs and delegation of fiduciary response in a multiparty network. Development of a business model that ensures the longevity of the blockchain solution is as important as technology acumen and design consideration—and is an endeavor that requires careful analysis of the business of blockchain business models.