2019 Enterprise Blockchain: Permissioned Blockchain Current State of Adoption and Revenue Models

Enterprise blockchain typically uses permissioned blockchain platforms for their networks. There are three main differences between a permissioned vs. permissionless blockchain (e.g., Bitcoin and Ethereum):

1. permissioned blockchain is a private network that requires a membership to participate in the network,
2. participants in the permissioned blockchain could track any historical transaction and involved parties with identifiable information, and
3. the transactions in the permissioned blockchain are endorsed by a consortium which has to be accountable for their endorsements.

Part 1: Current State of Enterprise Blockchain Adoption

In this blog post, I mainly highlight the findings from the “2019 Cambridge 2nd Global Enterprise Blockchain Benchmarking Study.” The report shows that Hyperledger suite (with Fabric as the flagship protocol) is the most frequently supported protocol framework by integrators and software development platforms (55%), followed by Corda (15%), MultiChain (10%), Quorum (6%), and Steller (3%), and others (11%). The selection criteria of core protocol framework included: vendor maturity (52%), performance and scalability (44%), use case fit (24%), privacy and confidentiality (24%), security (20%), unique features (16%), interoperability and extensibility (16%), cost factors (12%), open-source (8%), and other (8%).

An important note is that although it is blockchain system, at the current state, most of the existing enterprise blockchain networks in production are currently hosted in a single-cloud environment where nodes are all administered and operated by a single third-party service provider (e.g., IBM Blockchain) who is also responsible for producing blocks. In this regard, project members can then connect to the platform host via a trusted API connection. It turns out that in 69% of these cases (during this report).

As expected, nearly half of live blockchain networks are related to finance and insurance (43%), followed by cross-industry (9%), accommodation and food services (6%), health care and social assistance (6%), retail trade (4%) mining, quarrying, and oil and gas extraction (4%), transportation and warehousing (4%), arts, entertainment, and recreation (3%), wholesale trade (3%), public administration (3%), real estate and rental and leasing (3%), and others (12%). Data suggests that most live networks have launched with a narrow focus on a specific use case, although the intention to gradually broaden the scope to include other industry-related usages is often highlighted in the official roadmap. As for the customer base, 44% are by large corporation, followed by SMEs (15%), public sector institutions (13%), individuals (10%), start-ups (10%), central banks (6%), and non-profit organizations (2%).

Adoption in Central Banks

In terms of the use case of central banks, the surveyed finding suggests that alternative technologies may be better suited than blockchain for central bank-issued digital currency (82% in 2017 vs. 56% in 2018). However, blockchain technology remains a popular candidate tool for increasing the resilience and robustness of critical payment infrastructure, such as real-time gross settlement systems (not available: n.a. in 2017 vs. 50% in 2018), settlement system (n.a. in 2017 vs. 44% in 2018), ownership records management (14% in 2017 vs. 25% in 2018), but no much variation for payment networks (55% in 2017 vs. 50% in 2018) and regulatory compliance (36% in 2017 vs. 38% in 2018).

Adoption in Other Public-Sector Institutions

Meanwhile, in term of the use case of other public-sector institutions, the surveyed findings suggested a shift of blockchain activities from ownership (50% in 2017 vs. 35% in 2018) and business records management (31% in 2017 vs. 22% in 2018) to personal records management (e.g. birth and death certificates; 31% in 2017 vs. 43% in 2018). Moreover, blockchain technology is increasingly explored as a potential tool for the development of new payment and value transfer systems (13% in 2017 vs. 57% in 2018) that would increase transparency—and thus facilitate regulatory compliance (25% in 2017 vs. 52% in 2018) for companies and institutions alike by providing an auditable log of verified records and taxation purpose (6% in 2017 vs. 17% in 2018).

Value Proposition of Enterprise Blockchain

Before 2018, blockchain could be related to hype; however in 2019, many projects have been in production as they realized the value proposition of adopting blockchain technology in their operations. The report found that blockchain networks can provide value to enterprises in three ways:

1. reduce costs by removing avoidable reconciliation steps between company ledgers (72%)
2. generate revenues through the provision of new services enabled by the access to shared data (6%)
3. create new market models and types uniquely equipped by the shared network that did not previously exist (6%)

Since blockchain is related to a shared data network, a look at the type of participants for shared-use networks reveals interesting insights: in their current form, more than half of production networks have been set up between business partners, whereas only 19% have launched with the participation of direct competitors. 24% of covered networks have a combination of competitors and partners that are less straightforward to categorize, given that they occupy different positions in the value chain (downstream and upstream). In their current form, 57% of the blockchain networks are set up between business partners.

Another interesting finding is about the timeframe of a blockchain journey. It is considered as a long-term business investment that required an average of 25 months from the proof of concept to pilot/trial then in production (i.e., full deployment of a blockchain network in a production environment). This supports the view that enterprise blockchain projects are journeys that involve the transformation of core market infrastructure, which naturally require a longer time frame and more patience than simple application development. Moreover, successful network launches do not immediately translate into commercial benefit: most live networks have yet to see extensive usage after being deployed in production. It will likely take years before a significant impact can be observed. Although the adoption of blockchain technology is a long-term journey, many corporations are willing to invest their resources in this technology due to eight key drivers:

1. 69% agreed: Delivering new revenue-generating products and services
2. 62% agreed: Improving efficiencies across organization boundaries
3. 62% agreed: Increasing transparency
4. 55% agreed: Potential cost savings
5. 26% agreed: Improving efficiencies within organization boundaries
6. 14% agreed: Fear of losing competitive advantage
7. 10% agreed: Enabling trading of illiquid assets through tokenization
8. 5% agreed: Reducing moral hazards

Why Some Projects Were Abandoned

On the other side, the report also revealed that the vast majority of blockchain experiments, proofs-of-concept, and trials do not pass to the next stage. While project launches are generally announced with great fanfare, including press releases, blog posts, and news articles, many ends up being quietly abandoned with little to no public acknowledgment. This further fuel the hype by creating an artificial perception that blockchain technology has been widely adopted. There are six major reasons for discounting a blockchain project:

1. 62% agreed: No realization of tangible benefits
2. 38% agreed: Confidentiality and privacy concerns
3. 25% agreed: Unsuitable technology for business case
4. 19% agreed: Technical issues
5. 12% agreed: Budget overrun and/or lack of additional funding
6. 12% agreed: Lack of executive (e.g., CEO, CFO, COO) buy-in

As noticed in the report, 25% of network operators discontinued a blockchain project on the basis that the technology turned out to be unsuitable for the aimed business case. When they were asked whether they were aware of alternative technologies such as cloud computing or traditional distributed databases that may be better suited to deliver the same business case, only 16% acknowledged that this was the case. 33% responded that they do not believe an alternative technology could provide the same benefits, demonstrating significant confidence in the technology’s useful capabilities. 37% of respondents are either still investigating alternatives or remain unsure about the existence of potential substitutes that would provide more enormous advantages. Importantly, the main challenges that inhibit a broader adoption of enterprise blockchain in both private and public sectors are the poor understanding of the technology (i.e., knowledge gap; scored more than 4.29/5) and reluctant to change established processes (scored more 4.22/5).

Market Approaches for New Entrants

As we all know, the adoption of blockchain technology is still in the early stage; most of the companies are waiting to unlock their transformative potential after completing the testing phase and achieving extensive usage. Nevertheless, survey data suggests that 67% of organizations engaged in blockchain activities are either satisfied or very satisfied with the overall performance and outcome of their projects. There are two blockchain market approaches for new entrants:

1. Join an existing network

By joining an existing network, an entity can faster go-to-market (i.e., speed), and has a limited cost associated with the coordination and development costs (i.e., cost-effective). Further, the entity does not need to set up a new technology infrastructure as it is already tested by the existing network (i.e., reduce complexity), where the use case fit has already been tested and validated in many cases (i.e., business case validation), in which enhances the lessons learned by other network members (i.e., accelerated learning). However, the entity has to subscribe to the on-boarding or licensing fees. It does not have much influence over the decision-making process, technical standards, and commercial mode (i.e., adhere to existing terms and conditions). That is, this entity has to depend on the existing technology infrastructure (i.e., limited flexibility), where the commercial benefits for revenue-generating use cases may potentially be less noticeable (i.e., reduced commercial opportunity).

1. Create a new network

While creating a new network, this entity can have full influence on the use of case fit, technical architecture, and standards, as well as governance and commercial model (i.e., influence). In this sense, the entity can create a new system from scratch that free from technical debt (i.e., flexibility), which potentially creates a new industry-leading utility (i.e., relevance) and lead to a new form of revenue-generating use cases (i.e., commercial up-side). Nevertheless, the entity has to put a huge effort into coordinating, developing, operating, and designing the governance of the new blockchain network (i.e., cost and extra resources). It will be a time-consuming project as the entity has to get support from both internal and external parties to buy-in their new network (i.e., time-consuming), as well as to take the initiative for regulatory and legal approvals (i.e., regulatory uncertainty). Another potential risk is that a new network may not has a possible network effect if there is no possibility for future interoperability (i.e., lack of critical mass).

Part 2: Revenue Models of Enterprise Blockchain

As mentioned before, although there are numerous of blockchain projects are in the production and deployment stages, the enterprise blockchain industry is still in the early stage. Further, the network on network effect is still an infant, and thus, innovative new business models are yet to emerge. Based on the report, most of the revenue models are utilizing revenue models that practiced in traditional software services. Generally, four levels of hierarchy relate to the enterprise blockchain revenue models:

Type 1: Revenue Model on Application Layer

1. Based on application usage: Vendors and application providers monetize the application usage of the layer based on access fees, transaction fees, and licensing fees.
2. Based on application development: Vendors and application providers monetize the application development layer based on application build cost and licensing cost.
3. Based on network operations: Regular fees could be billed on end-users based on their initial triage of queries/problems and problem resolution support of the network service.
4. Based on third-party complementary services to end-users: Application providers can charge end users for accessing network functionality via a third-party interface.

Type 2: Revenue Model on Network Layer

1. Based on network operations: Network participants can charge transaction fees for processing transactions and setting up commercial APIs to external parties to provide network insights and data services, but also broadcasting transactions to the network.
2. Based on gatekeeping and governance: Network operators can monetize access to their networks via onboarding fees and IP licensing, while also potentially charging for platform maintenance, upgrades, and operational support.
3. Based on cloud delivery services: Venders provide cloud services by relying on usage fees that based n compute, storage, bandwidth, and so on.
4. Based on network servicing: Network operators and vendors provide the participants with a fully-managed blockchain network by incurring each member’s fee based on the number of nodes and activity levels.

Type 3: Revenue Model on Protocol Layer

• Based on underlying technological building blocks: Vendors provide sophisticated enterprise versions of open-source protocol frameworks and offer service level agreements and premium support packages to customers.

Type 4: Revenue Model on Full Stack Services

1. Based on Blockchain-as-a-service (BaaS): Vendors (e.g., IBM Blockchain) provide a blockchain service package ranging from project ideation to full deployment, including a managed cloud environment and active platform maintenance. This model enables customers to configure and deploy a whole network within minutes to rapidly prototype and test applications in a sandboxed environment without needing to dedicate significant time, talent, and R&D costs.
2. Based on solution design: Vendors provide education and training, ideation, consulting, and strategy for implementation.

Conclusion

In comparison to the 2017 Cambridge report, the enterprise blockchain sector has experienced an enormous advancement as nowadays more than hundreds of active and live blockchain network are available. Also, there is an increasing shift to the application layer, which focuses on building business applications on top of the blockchain network layer to leverage its network data. The surveyed findings also demonstrated that experts believe that the adoption in the private sector (79%) and public sector (63%) will arrive within five years.

References:

Reports of the Cambridge 2nd Global Enterprise Blockchain Benchmarking Study: https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/2nd-global-enterprise-blockchain-benchmarking-study/

Author: Teck Ming (Terence) Tan