Blockchain – a highly encrypted method of transmitting data over a network – first came into the public consciousness with the rise of cryptocurrencies such as Bitcoin and Ethereum, but big businesses have been slow to adopt the technology.
Now, a new book from Northeastern Professor of International Business and Strategy Ravi Sarathy, “Business Strategy for Blockchain: Lessons on Disruption from Fintech, Supply Chains and Consumer Industries”, explores the reasons behind this reluctance and offers solutions to the problems blockchain still presents.
Blockchain relies on a distributed network of computers to provide “a very high level of encryption,” says Sarathy, in which member computers within the network collectively validate transactions.
When a transaction is authenticated, it is added to a “block”, each of which contains information about transactions in previous blocks. As these blocks accumulate, they form a chain, an “immutable” digital record or ledger of every transaction ever made along that blockchain, Sarathy says. “You can go all the way back to 2009, when the first Bitcoin transaction took place, and literally trace … every transaction in every Bitcoin ever created.”
Thanks to these collective validations, he says, blockchains are very secure. “The Bitcoin network itself has never been hacked. Wallets have been hacked, where people store Bitcoin, [and] exchanges, which store Bitcoin on behalf of the customer, have been hacked,” but the Bitcoin blockchain itself remained secure.
According to Sarathy, these secure, distributed digital files represent the next big disruptor in traditional businesses. Disruption is important in all kinds of industry, says Sarathy, because it represents a force of “creative destruction.”
Describing what creative destruction looks like, Sarathy cites the rise of digital photography over the past 20 to 30 years. On the one hand, digital photography wiped out the big business of chemical film photography. On the other hand, the disruption of this industry has allowed the proliferation of photography in the hands of anyone who owns a smartphone and a whole new market for both digital photos and new camera equipment.
So how could blockchain upend hitherto standard ways of doing business?
Essentially, Sarathy says, blockchain promises to simplify some of the most common day-to-day activities of businesses, from validating the authenticity of complex exchanges to removing the “middlemen” from internet-based transactions.
Traditionally, intermediaries such as banks provide assurance between two parties exchanging one thing for another. After delivering a product, a seller may wonder, “How will I make sure I get paid? The bank supports this type of counterparty trust.” Sarathi says, “but the bank charges a commission.”
With a blockchain solution, “a decentralized network, users can transact directly with each other without the need for an intermediary.”
Take supply chains, a field catapulted by the COVID-19 pandemic. Traditional supply chains relied on “bills of lading,” notes Sarathy, to provide “both proof that goods were on board and ownership of those goods. And you can trade [bills of lading] between the parties”.
But, Sarathy is quick to note, these are all paper documents, subject to damage, loss, theft, forgery and simple mistakes.
Blockchain technology, however, provides a means of instantaneous exchange, not only of data, but of value itself.
“Business Strategy for Blockchain” also addresses the factors that have made companies hesitant to adopt the technology. First, because blockchain is based on a large network of computers, the validation process can take time.
Additionally, because blockchain is so computing intensive, it requires high levels of electricity, a fact often raised by climate change activists. But Sarathy notes that Ethereum — a cryptocurrency similar to Bitcoin — recently adopted new protocols that make the blockchain more energy efficient and faster.
The very idea of disruption can be seen as negative, and one of the hurdles companies will have to overcome is organizational reluctance to change, says Sarathy. Large businesses are hierarchical and integrating decentralized processes can seem overwhelming.
But, Sarathy says, the promises of blockchain technology, such as “financial inclusion,” more secure voting technologies and instant value transfer, outweigh the barriers to its adoption.
Businesses are 'part of an ecosystem'. Sarathi says. “Good strategy sometimes requires companies to work together across ecosystems.”
“Blockchain Business Strategy” published by MIT Press on October 11. In conjunction with the book launch, Sarathy will hold a free public webinar and Q&A, hosted by MIT Sloan Management Review, on October 19. You can register for the event herewhich will provide access to a recording of the webinar.
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