Marco Iansiti and Karim R. Lahkani published an article in the Jan-Feb 2017 issue of Harvard Business Review called “The Truth About Blockchain,” offering their opinion on this emerging technology and the huge amount of hype that has surrounded it.
Their thesis is that new technologies find homes across a range of applications, from simple “Single Use” functions where the technology makes an existing process more efficient to complex “Transformation” functions that dramatically change industry structures.
Single Use applications are the most straightforward ways for new technologies to become adopted. Users, familiar with existing processes, see the new technology as an enhancement that provides a clear benefit at low or no cost. Often, they will turn to an existing supplier or internal department and expect that they will simply see a reduction in cost, greater efficiency, or higher performance or capacity that comes from adopting the new technology. Examples abound in many industries and consumer applications — acetaminophen cured the same headaches as aspirin with a similar dose and frequency but without stomach upset complications. Bitcoin futures trading launched on December 1, 2017 through two Chicago-based exchanges, CME Group and CBOE. As far as these two exchanges are concerned, bitcoin spot pricing, established by Gemini, is not much different from spot pricing for West Texas Intermediate crude oil or soybeans. Similarly, we are seeing a handful of luxury goods dealers accepting bitcoin alongside fiat currencies. There have been many publicized examples of people exchanging their rapidly appreciating bitcoins and Bitcoin Cash, worth about 20x the level of just one year ago, for condos, exotic cars, and art. Burger King in Russia created a cryptocurrency they call WhopperCoin, which acts as a promotion incentive in their fast food restaurants. Every ruble spent on a Whopper earns one WhopperCoin. After accumulating 1700 WhopperCoins, consumers can exchange their tokens for a free Whopper sandwich.
The second stage of adoption involves technical substitution. In this mode, the core process functions do not change, but new firms and offerings displace older ones. According to CoinATMRadar, 61 countries now support almost 2000 bitcoin ATMs, in which cryptocurrency holders can buy and sometimes sell bitcoins or other cryptocurrencies. The US leads this industry, with 64% of the installed base of these devices. Bitcoin gift cards (essentially hardware wallets) are available from Amazon and other web retailers. There are dozens of blockchain-based gambling sites such as True Flip that have emerged in the past 18 months. Some geographies like Malta are friendly to gambling sites, and blockchain gambling adds anonymity as well as performance transparency to this large, established industry.
The third stage in the adoption of blockchain technologies involve new local services, often previously not available except to or through a few parties. Bitcoin has become a useful tool for low cost cross-border money transfer. Until a year ago, almost all person-to-person foreign exchange payments went through a handful of high cost services such as Western Union or Moneygram. Bitcoin transfers take place in the time it takes to send and receive an email, and the currency conversion fees are approximately half of the level charged by the major incumbents. IBM recently introduced its AI-based Watson IoT and Hyperledger initiatives to connect business partners to share and analyze IoT sensor data. The IBM Blockchain smart contract acts as an independent third party to certify the authenticity of the content. Interbank clearing and settlement is an unsexy back office function that costs the investment banking community billions of dollars to run and audit. Depository Trust and Clearing Corporation (DTCC) is working with IBM, R3, and Axoni to shift post-trade clearing of single-name credit default swaps to a blockchain system.
These three stages are sustaining innovations with increasing impact on industry costs, but do not necessarily disrupt the overall industry value chain. The fourth stage, however, involves a total overhaul of the core industry structure with blockchain systems tearing apart the normal centralized command and control structures. In this final stage, smart contracts replace the expected role of a trusted master owner for the marketplace; buyers and sellers agree independently on terms for their own transactions, and they publish their decisions and certify that each has held up their end of the bargain. There are hundreds of blockchain projects aimed at one or another specialized marketplace, from sensors (IOTA) to energy (SolarCoin, WePower), healthcare records (Patientory, MedRec), identity management and security (ABT, CUBE), and media content rights management (StreamSpace, SingularDTV, Mycelia/UjoMusic, Revelator).
These disruptors are most successful when they target unserved or underserved segments of users that do not place a high value on the conventional services provided by the centralized incumbents and their preferred value chain partners. Netflix is busy becoming a major content developer studio, partnering with the dominant broadband service providers, AT&T, Verizon, Comcast, and Charter Spectrum to ensure superior viewing experiences through its CDN. Google’s YouTube TV is looking to become a cable replacement service, offering live TV streaming to smartphones and smart televisions. Alternative service providers will succeed when they bring unique content that appeals to people who want something different — independent media content, foreign news and entertainment, specialized educational content or online classes, and interactive virtual/augmented reality services, among others.