How to identify a true blockchain use case with 11 questions
The reality behind the hype
I was born in a medium-sized city in Northern China named Harbin, a place that is mostly famous for two things: beer (the first beer brewery in China was founded here) and ice sculpture. Cutting edge technology is rather remote to the city of Harbin. Dad was a retired businessman who spent most of his life in the hospitality business sector. In one of my recent visits home, dad asked what I have been busy with lately and I told him that I had been busy with something called “Blockchain”. His answer shocked me, “I know what that is”. When my old man told me that even he knows blockchain, then I knew for sure that there is huge hype about blockchain. The only question that popped to my mind was, just how big is this hype around “blockchain” or “distributed ledger” technology?
Gartner gives a pretty impressive answer as it forecasts that the business value of blockchain will reach $360 billion by 2026, surging to $3.1 trillion by 2030. People and businesses jump right into the craze of blockchain with the mindset that it is the “new Internet”, investing on an ICO and rolling out a blockchain solution without understanding the fundamental problem that blockchain is solving (refer to “The Age of Trust — The Problem Blockchain Solves that Others Cannot”).
In the MERL Tech 2018 conference in Washington, DC, three MERL practitioners documented 43 blockchain use cases through Internet searches, most of which were described with glowing claims like “operational costs… reduced up to 90%”.
“However, we found no documentation or evidence of the results blockchain was purported to have achieved in these claims. We also did not find lessons learned or practical insights, as are available for other technologies in development.”
I consider most of these use cases to be funded by startups, so maybe that won’t count.
What about in the corporate world?
Having worked with a wide spectrum of multi-national companies, I view the so-called “Blockchain projects” to be more driven by the FOMO (fear of missing out) factor instead of by compelling use cases which are structurally evaluated. I often hear claims such as “We already implemented blockchain in our system” (most of which are “Proof of concept” projects). I then ask for what the use case behind their blockchain project is and find out most of the use cases did not need to apply blockchain solutions. So, what happens to some of these projects? They got launched, the company got the headline, then people went back to the legacy system as they were much easier, user-friendly and cheaper to use and maintain. According to CNBC, “84% Of Companies Are Dabbling In Blockchain”. To be fair, blockchain is still at its early stage; most of companies are discovering and experimenting around blockchain with the aim of proving the viability of its use in their businesses. Refer to the figure below.
The purpose of this article is to show you how to structurally evaluate blockchain ideas, pick up the real use case and apply the right type of solution.
The blockchain use case evaluation framework (2019)
To assist you in evaluating blockchain and identifying the right use case, I developed a blockchain use case evaluation framework I call the “Chili Sauce Blockchain Evaluation Framework”. Here are a few things to take note of:
1. This framework was developed with reference to the white paper “Blockchain beyond the Hype” from the World Economic Forum (WEF).
2. I made a number of modifications, i.e. I felt the original white paper didn’t consider solutions like “asset tokenization,” hence it regards physical assets not suitable for blockchain.
3. I added and removed a few questions based on my experience from working on corporate blockchain projects as well as startup ICO projects.
A: Are there compelling events to remove intermediaries?
The first thing to consider when you evaluate any blockchain use case is to understand what problems you are trying to solve and subsequent benefits. Blockchain introduces a trust mechanism that is trustless. In other words, it is independent of where it resides and who operates it, as the trust mechanism is mathematically proven. Hence, it removes the intermediaries and unlocks a new type of business model and set of benefits.
B: Are you working in a multi-stakeholder environment (i.e. more than 2 entities are involved)?
Blockchain is most effective in dealing with a multi-stakeholder situation, ideally involving more than 2 entities. Modern financial accounting is based on the double-entry book keeping system and it comes with its limitation by design. For example, it requires a third party to validate the transaction record. Blockchain provides a solution to this limitation by introducing three-entry accounting in which all accounting entries/transactions involving outside parties are cryptographically sealed by a third entry and reside in a shared ledger. The third entry serves as a digitally signed receipt for the parties involved in the transaction, which can be verified without the need for a central certifying authority or a clearing house.
One example of this type of environment is roaming services for mobile network operators (MNOs) and Telcos where all the mobile network operators rely on data and financial clearing houses (DCH/FCH) for the data, voice and financial reconciliation service. Applying blockchain to roaming services will potentially save MNOs millions by removing the need of using intermediaries such as DCH and FCH.
C: Are you working with digital assets instead of physical assets?
Blockchain is effective when it comes to “digitally native” assets. With asset tokenization it becomes feasible to apply blockchain with physical assets also. For example, Quorum, an enterprise version of Ethereum developed by JPMorgan, is used to tokenize gold bars based on Australian Financial Review.
Note, this possibility was ruled out in the original WEF white paper. While I believe it is possible, I’ll suggest you proceed with caution given the following considerations:
C1: Do you have a robust “Tokenomics” model (i.e. one that supports asset tokenization)?
“Tokenomics” is a combination of token + economics. The newly created word describes the very principle of asset tokenization really well, that is the business model of digitalizing physical assets to units of digital value (token) needs to make economic sense. That requires you to think about the role of your token in your “tokenomics” model, its purposes and the features that fulfill these purposes. For example, a key role that the designated token plays is value exchange. The purpose of value exchange is to ensure users are able to earn value and to spend it on services that are internal to the inherent ecosystem. For more details about tokenomics, I will refer you to the article “Tokenomics — A Business Guide to Token Usage, Utility and Value” by William Mougayar.
C2: Can you couple digital assets with physical assets with permanent and authoritative record of proof?
In my opinion, this is probably the most difficult part of asset tokenization. I call it “the last mile challenge” of asset tokenization. The phrase “last mile” is commonly used in the telecom world to describe the final leg of the telecom network to end user premise. The last mile is also the most expensive part of the end-to-end network connectivity as it is often not owned by the telecom company who delivers the end-to-end connection. In the blockchain world, to mirror physical assets with digital tokens, you need to be able to link the two forms of assets legally and financially. For example, if you are going to tokenize a real estate property, the “token” needs to have the same legal binding as your property ownership certificate endorsed and protected by the local jurisdiction. This is the first part of the last mile challenge — how do you legalize the tokenized asset? The second part of the last mile challenge is on the financial side. Currently, the vast majority of countries have laws that require financial institutions to use depository banks for securing asset collateral. No such depositories exist for digital assets. This means there are no legal means for digital assets to be secured for use in the mainstream financial sector, regardless of the state of the technology.
In short, asset tokenization via blockchain is more of a business challenge than a technical challenge.
I have seen many ICO startups fail to address this part no matter how technologically savvy they are. To proceed with caution is strongly advised (I plan to write a dedicated article on the “The Last Mile Challenge” and relevant mitigation advice. You are more than welcomed to follow me on Medium or LinkedIn for the update.)
D: Do you require shared write access?
Do stakeholders in your network need to be able to write transactions to the blockchain? If the answer is “No” then you don’t need blockchain as the solution.
E: Do you require high performance, rapid (milliseconds) transactions?
Blockchain is not very efficient when it comes to transaction speed due to its consensus model. Does your use case require the transaction to be in milliseconds? If so, you will need to carefully evaluate different platforms to make sure they meet your requirement. For example, IBM Hyperledger Fabric uses a new execute-order-validate architecture which boosts the transaction speed to 3,500 transactions per second in a single cloud data center environment.
F: Do you intend to store non-transactional data as part of your solution?
The basic usage of ledger is to record transactional records. This works well for blockchains designed to host a currency which uses a transaction model. The data stored on chain are transactional data. Considering most of the chains only allow a limited amount of data to be stored on chain i.e. in the range of kilobytes, it is therefore not practical to store non-transactional data such as videos, images etc. due to their size. So if you intend to store large dataset or non-transactional data as part of a blockchain solution, I suggest you look at a hybrid solution involving both blockchain and a conventional solution. For example, storing the hash of data on blockchain and storing the actual data off chain i.e. on a database. That way we can tell if our data was modified by just looking at the hash. For more information, I suggest you read: “Storing Data on the Blockchain: The Developers Guide”. Finally, ask yourself the very first question before proceeding further, why consider blockchain?
G: Do you want/need to rely on a trusted party, for example, for compliance reasons?
If an industry has specific requirements on the use of intermediaries or trusted partners, then it may be complicated to deploy blockchain, even if other benefits of its use are readily apparent. The key challenge is to convince them to play a part in your ecosystem.
H: Do you need to be able to control functionality?
If the ability to change the functionality on a blockchain (e.g. node distribution, permissioning, engagement rules, etc.) without having a detailed discussion across the large open-source forums for blockchain is desirable, then you should select a private, permissioned blockchain.
I: Should transactions be public?
If transactions need to be kept private, then a private, permissioned blockchain is appropriate. If not, then a public, permissionless blockchain may be used.
The Chili Sauce Theory
Why do I want to name it as the “Chili Sauce Blockchain Evaluation Framework”? as I felt blockchain is like chili sauce. Chili sauce is surprising because you can put it on a number of things and it really tastes good. But there are some things chili sauce just doesn’t belong on. For example, you’d never put chili sauce on an ice cream. Understand that blockchain is like chili sauce — there are a lot of areas you can add a little splash of blockchain to, and end up making a much better and more compelling solution. However, it is certainly not a one size fits all, all or nothing type of proposition. Blockchain implementation is really best when it’s combined with conventional technology.
Finally, I hope you can take away this nugget:
“The success of blockchain implementation is never about the technology, as it wasn’t built on technological innovation, but rather a new way of managing transactions.”