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This chapter is from the book

Considerations for Meaningful and Sustainable Blockchain-Powered Business Networks

The long-term promise of blockchain as a business network implies a trusted platform for disintermediation that leads to market and cost efficiencies. Blockchain market share, which includes both technology and those industries that use the technology in the networks and ecosystems they initiate, is defined by the evolving valuation models of business networks.

In this section, we discuss the evolution of meaningful and sustainable blockchain-powered business networks. The work that the industry (technology companies, fintech start-up ecosystems, and industry consortia) has done in the past few years largely focused on maturing the technology and promoting adoption of the technology by enterprises and businesses as a means to solve current problems and pave the way for new business models (enterprise and subsequent industry focus). As the industry and enterprises realize the potential of blockchain technology and reimagine today’s business networks, which are laden with archaic processes, paper- and document-driven processes, and systemic costs, they must also address long-term considerations related to adopting the blockchain-powered business network.

To use blockchain effectively, you must consider other mechanics of the business network:

  • Choice matrix of consensus models: The industry must develop a choice matrix for consensus models that define the trust system, collusion vector, associated computation costs, and infrastructure investment necessary to support the trust system that defines the business network.

  • Systemic industry governance: Technology and industry-specific governance is necessary for the systemic digital assets, industry-specific requirements, and business systems that govern the movement, whether permanent or temporary, of digital or tokenized assets within a specific ecosystem. Essentially, such governance defines which entities can do what, who is responsible, and who investigates if a system anomaly arises. These questions, which are industry-specific concerns, must be codified in system design and network initialization.

  • Asset tokenization, control, and governance: Industry-specific elements are needed to govern asset issuance, collateralization, proof of ownership and existence, and audit requirements so as to ensure the integrity of the real assets in the system. The idea is to weave checks and balances into the system that control supply and demand and establish an audit trail to maintain systemic trust in the business network.

  • Decentralized authority framework: The notion of decentralized control and authority is tightly linked with the trust system. Of course, in a decentralized system, the notion of authority does not work well. The focus of this design principle, therefore, is on governance, culpability, and regulations.

  • Decentralization and security considerations: Decentralization and distributed ledgers have various trust advantages, such as a transparency, immutability, and network-wide transaction processing. Although these advantages lend themselves to the overall trust framework, they can also create enterprise challenges concerning distributed data, as well as business insights that can provide a competitive advantage to some participants and a disadvantage to others. The security design imperative is to factor in enterprise security while addressing the new security challenges imposed by a shared business network. Cybersecurity risks and vulnerabilities are high-focus areas.

Business networks are industry-, industry segment–, and asset-specific networks, which implies that no single dominant blockchain controls all other blockchains, and that many blockchain business networks exist. A blockchain network can focus on a plurality of business domains, such as mortgages, payments, exchanges, and clearing and settling specific asset types. In enterprise blockchain, these projects take place within a centralized (in a decentralized context and application design patterns) network that is a consensus consortium between like-minded business entities. This assumption is based on many practical factors:

  • Industry-, segment-, and asset-specific business language: This language defines the smart contract, asset definition, and control and governance of smart contracts as a proxy business representation.

  • Industry-specific asset control: This factor defines governance, management, and valuation (for asset exchange, asset fungibility, and others) of digital (representation or) tokenization of assets.

  • Industry- and region-specific regulation: Most business networks are both industry- and region-specific in their scope. In regulated industries, a business network is regulated separately in terms of the burden of adherence, compliance, and related costs that are shared in the business network.

  • Industry-specific business functions: Most industries have their own measurements, standards, and statistics that represent performance indicators, such as analytics and market data.

For enterprises today, the blockchain-powered business network is limited by the current business network. The business design impacts the technology design, and a technology design might affect business network sustainability. If the system design of the business network is not aligned with the tenets of blockchain (i.e., trade, trust, ownership, and transactionality in a multiparty scenario), the greatest strengths of blockchain might become its greatest weakness, and the business network might never fully realize the promise of blockchain networks.

Enterprise Integration: Coexisting with Existing Systems of Record

Integration of blockchain with the enterprise system is a business and technology consideration due to downstream transaction systems that feed into and rely on critical business and operation systems. Various blockchain project evaluations have revealed that adjacent system integration has a significant cost impact on blockchain projects—and if you do not address these costs early in the planning stages, they may negatively affect enterprise adoption. Such impeding elements can disrupt the enterprise’s operations. Moreover, the various fragmented systems that may have evolved as extensions (innovations) of the legacy system due to changes in business models, business process innovation, and advancement in technology can present challenges for blockchain integration.

We also must account for adjacent enterprise systems that require enterprise integration for blockchain applications and have operational implications. In the best-case scenario, the elements of trade, trust, and ownership, and the inherent properties of blockchain, such as immutability, provenance, and consensus, will foster a trust system that aids in eliminating redundant and duplicative systems and processes; such duplicative systems carry costs for the enterprise in terms of significant allocation of resources, leading to delayed transaction processing and associated opportunity costs. Our goal should be to address the fundamental problems of the existing process, leading to a flat and transparent ledger that aims to address the element of trust and time, significant costs savings, and better client service.

Blockchain Network Extensibility

Extensibility is defined as “a system design principle where implementation takes future growth into consideration.”7 It is a systemic measure of the ability to extend a system and the level of effort required to implement the extensions.

Blockchain business network design should aim at extensibility because of the dynamic nature of the business (regulation, competitive pressures, market dynamics, and others) and network growth due to inclusion of new entries, such as new ecosystem participants, as well as existing players (regulators, market makers, liquidity providers, fungibility providers, service providers, and others). Several factors must be taken into consideration regarding network extensibility in blockchain system design:

  • Extensible membership models: The design must support the inclusion of a diverse set of participants, the volume of participants, and the desired transaction processing capabilities. As the industry changes, so does business, which in implies changes in the members that join the network. The network must be designed to onboard and cope with membership changes in the network. Various network participants might want to join or leave the network. The mechanics of membership changes include access to (shared) data, which must be considered in the design. The member type is also an important consideration, because the roles and type of member might change as blockchain either disrupts or disintermediates certain membership types.

  • Trust system viability—compute equity versus network economic incentive: The appropriate trust system choices for a permissioned (public or private) network and its impact on infrastructure investment and economic viability are important because there is a divide between trust systems based on crypto assets (based on crypto economic models) and trust systems based on compute equity (or non-cryptocurrency). We must consider the long-term sustainable infrastructure costs and maintenance, which are directly related to the types of participants and their business interests in the business network. For example, the cost models of a regulator are different from the cost models of the primary beneficiary of the blockchain-powered business network.

  • Shared business model—shared costs and shared benefits: Because a blockchain-based business network is a network and ecosystem, it features shared business processes instead of flattened business processes. A blockchain-powered business network has specific business advantages, such as reduced risk, a reliable and predictable transaction network, and a reduced cost of compliance, which collectively lead to good ROI ratios.

However, shared business interest leads to other operational considerations, such as data sharing and data ownership as entities join and leave the network. The regulations around data ownership may also change from time to time, along with industry requirements regarding the durability of data. The shared cost of infrastructure, compliance, and efficiencies due to flattened business processes on a blockchain network are clear advantages of this approach, but these efficiencies can be achieved only with a sustainable structure of a business network and the correct economic models.

Blockchain Project Sustainability

Many design areas—such as business models, technology design, the trust system choice matrix, devising and employing a governance structure, and continual system analysis—are paths to ensure early success with blockchain project deployment and long-term sustainability. The idea is to design a robust, extensible, and organic system that can grow with the changing demands of a business ecosystem, and not be locked into a technology with limited flexibility.

Factors such as scale, security, data visibility, and network extensibility can be exploited to create a sustainable business network. After the network evolves and grows, there is no turning back regarding systemic issues, such as a trust models, data visibility, and competitive advantage while using the network for the shared costs of doing business. Maintaining a substantive focus on sustainability is a complex and paradoxical quest: It promotes open collaborative innovation while locking down some of the constructs, such as consensus or trust systems, and governance systems that govern the assets, smart contracts, and overall interaction in a multiparty transaction network.

As we debate the merits of signing transactions versus mining transactions to establish trust in the network, note that a blockchain-powered business network is limited by the limits of the current business network as it evolves. This is not a technology problem, but rather a business ambition issue. If the system design of the business network is not aligned well with the tenets of blockchain (trade, trust, ownership, and transactionality in a multiparty scenario), the greatest strengths of blockchain might become its greatest weakness, and the business network might not fully realize the promise of blockchain networks. Wise choices for factors such as scale, security, data visibility, and network extensibility, however, can lead to a sustainable business network.

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