blockchain has the potential to be able to solve this problem. As the core supporting technology for Bitcoin and other virtual currencies, blockchain is an open, distributed ledger that can efficiently record transactions between two parties to a transaction and be verifiable and stored forever. The ledger itself can be programmed to automatically trigger the completion of a transaction.

Five basic principles of blockchain technology

1. Distributed database

Each party on the blockchain has access to all data and its complete history. No one party has control over the data or information. Each party can directly verify the records of all parties to a transaction without the need for an intermediary.

2. Peer-to-peer communication

Each independent point can communicate directly with each other, without going through a central node. Each node can store information and pass all information to all other nodes.

3. Limited transparency

All users who have access to the system can see every transaction and its value. Each node or user on the blockchain has a unique address consisting of letters and numbers that serves as an identifier for that user. The user can choose to remain anonymous or disclose his or her identity to others. Transactions occur between addresses on the blockchain.

4. records cannot be changed

Once the results of a transaction are entered into the database, the account information is updated accordingly and the records cannot be changed because they are interlinked with all previous transactions (this is where the term “chain” comes from). Various computational algorithms and methods are used to ensure that the records in the database are permanent, chronologically ordered, and visible to all others in the network.

5. Computational logic

The digital nature of the ledger means that blockchain transactions can be linked to computational logic and can actually be programmed to do so. All users can set algorithms and rules so that transactions can be triggered automatically between nodes.

With blockchain technology, we can imagine a new world in which contracts are stored in a transparently shared database in the form of digital programming that cannot be deleted, tampered with, or amended. In such a world, every agreement, every process, every task and every payment would have a digital record and a digital signature that could be identified, verified, stored and shared. Intermediaries such as lawyers, brokers and bankers would no longer be necessary. Individuals, organizations, machines and algorithms are free to interact and transact with each other without friction. This is the endless potential that blockchain offers.

Virtually everyone has heard that blockchain will revolutionize business and will redefine the enterprise and the economy. While we remain enthusiastic about the potential of blockchain, we also worry that it’s a bit overstated. It’s not just security issues (like the collapse of a Bitcoin exchange in 2014 and the recent hack) that worry us. Our experience studying technology innovation tells us that if there is a blockchain revolution in the future, there will be many barriers – technical, governance, organizational, and social. Rashly applying blockchain technology innovations without a true and thorough understanding of blockchain is likely to be a big mistake.

We believe that it will be many years before blockchain is truly transformative for businesses and governments. Because blockchain is not a “disruptive” technology, disruptive technologies can impact traditional business models with low-cost solutions and can quickly replace traditional businesses. We see blockchain as a foundational technology: it has the potential to create a new foundation for our economic and social systems. But its implications are so broad that it will take decades for blockchain to penetrate the economic and social infrastructure. The process by which blockchain becomes widespread will be incremental, and this process and its strategic implications will be the focus of this paper.

Patterns of Technology Adoption

Before discussing blockchain strategy and investment, let’s recall the following technology adoption processes as we know them, especially for other underlying technologies. One of the most relevant examples is the adoption of distributed computer network technology, also known as the TCP/IP protocol, which laid the foundation for the development of the Internet.

TCP/IP first appeared in 1972, gaining widespread attention in a separate application scenario: its emergence as the basis for sending e-mail between researchers on ARPAnet, the precursor to the commercial Internet developed by the U.S. Department of Defense. Prior to TCP/IP, the architecture of communication systems was based on “circuit switching,” where the connection between two parties or machines had to be predefined and maintained through a switch. To ensure that any two nodes could communicate, telecommunications service providers and equipment manufacturers invested billions of dollars in private lines.

TCP/IP completely changes the above paradigm. The new protocol digitizes information and breaks it down into many small packets, each of which includes address information. Once released into the network, these packets can reach the receiver via any route. Data sending and receiving points in the network can break up the packets and can reassemble the packets and interpret the data. This eliminates the need for dedicated lines or large-scale infrastructure. TCP/IP creates an open, shared public network with no central agency or body responsible for maintenance and updates.

Traditional telecoms and related businesses are skeptical of TCP/IP. Few would have imagined that data, information, audio and video could be built under the new system, or that the associated systems would be very secure and evolve quickly. But in the late 1980s and 1990s, a growing number of companies such as Sun, NeXT, Hewlett-Packard, and Silicon Graphics developed internal local area networks using TCP/IP. In doing so, they developed related technologies that transcended the email domain and gradually replaced traditional LAN technologies and standards. As companies have adopted these newly developed technologies and tools, they have gained greater productivity.

In the mid-1990s, the advent of the World Wide Web led to the widespread adoption of TCP/IP. New high-technology companies began to provide the “tools” – hardware, software and related services – necessary to connect to and exchange information with the current open network. Netscape commercialized browsers, web servers, and other tools and components, and Sun drove the development of the application programming language, Java. With the exponential growth of information on the Web, Infoseek, Excite, AltaVista, and Yahoo! all emerged to guide users to TCP/IP technology.

Once this most basic infrastructure was widely accepted, a new generation of businesses was able to seize the opportunity presented by low-cost Internet access to create more Internet services, which in turn helped to form an alternative to the original business model. cnet moved news online. Amazon sells a wider variety of books than any brick-and-mortar bookstore. Priceline and Expedia make it easier to buy airline tickets and are more transparent about the entire buying process. These new entrants are expanding their businesses at a very low cost, causing traditional businesses like newspapers and brick-and-mortar retailers to feel pressure like never before.

relies on the widespread availability of the Internet to create new and revolutionary applications that can fundamentally change traditional business models and create value. These businesses are built on a new P2P architecture and generate value by orchestrating a distributed network of users. Imagine how Ebay transformed the online retail business with its auction model, Napster transformed the music industry, Skype transformed telecommunications, and Google transformed Web search by leveraging user-formed links to deliver more accurate search results.

Many companies are already using blockchain to track goods in their supply chains. Ultimately, it took more than 30 years for TCP/IP to become widely accepted – used alone, applied locally, replaced and driven by transformation – and reshape our economy. Today more than half of the world’s most valuable publicly traded companies are Internet-driven, platform-based business models. The foundation of our economy has fundamentally changed. The amount of physical assets and proprietary intellectual property is no longer a guarantee of competitive advantage; the companies that lead the economy can play a key role, especially in being able to organize, influence, and coordinate a broad network of communities, users, and organizations.

new system

blockchain – the P2P network at the top of the Internet – came into view in October 2008 as the core foundation of Bitcoin, a virtual monetary system that does not issue money through a central authority, transferring ownership and confirming transactions. Bitcoin is the first real-world application of blockchain technology.

The similarities between blockchain and TCP/IP are obvious. Just as email allows people to exchange information, Bitcoin allows people to transact with each other. The development and maintenance of the blockchain is open, distributed, and shared – just like TCP/IP. A group of volunteers around the world are maintaining its core software. Like email, Bitcoin has received enthusiastic support from the start, but only from a relatively small number of people.

TCP/IP has dramatically reduced the cost of interconnection, thereby creating new value for economic development. Likewise, blockchain can dramatically reduce transaction costs. Blockchain has the potential to become the system of record for all transactions. If this becomes a reality, new types of businesses based on blockchain technology will influence and control emerging industries, and then the economy will once again experience fundamental change.

Let’s start by looking at how businesses work today. Keeping records of transactions is at the core of what every business must do. These records track past activity and effectiveness, and provide guidance for the future. They provide an understanding not only of how the business works internally, but also how connections are maintained between the business and the outside world. Every business or organization has its own records, and they are private and confidential. Many businesses do not have a general ledger of all activities in the business; instead all records are scattered within the business in various branches or departments. The problem is that coordinating transactions between individual and private books takes a lot of time and is also error prone.

For example, a typical stock transaction can be completed in a few microseconds without human intervention. However, settlement – the transfer of stock ownership – can take up to a week. This is largely because each party does not have access to the books of others and cannot automatically prove ownership of assets or transfer them automatically. Instead, many intermediaries are needed to ensure the existence of the assets and to document the transfer of ownership of the assets.

In a blockchain system, the ledger can be replicated in many of the same databases, with each party having a set of data and the records being maintained by the stakeholders. When one party’s data is changed, all other copies of the ledger are updated simultaneously. Whenever a transaction occurs, the asset type and value of the transaction is recorded in all books. No third-party intermediaries are needed to prove or transfer ownership. If a stock transaction occurs on a blockchain system, its settlement will be completed in seconds, very secure and verifiable. (The vulnerability of the hack that attacked the Bitcoin exchange did not lie in the blockchain itself, but in the separate system that uses the blockchain and connects the parties.)

If Bitcoin is like the early days of email, is the blockchain still decades away from reaching its full potential? In our opinion, the answer is yes. We can’t predict exactly how many years it will take for change to happen, but we can speculate on what applications will emerge first and how blockchain gaining widespread acceptance will eventually become a reality.” How

base technology will gain widespread acceptance “There are typically four stages to the spread of

base technology. Each stage depends on the innovation of the application and the complexity of the coordination effort. Less innovative and less complex applications will be accepted first. TCP/IP technology, introduced by ARPAnet in 1972, has reached a transitional stage, but blockchain applications are still in the early stages of development.

In our analysis, history shows that there are two dimensions that influence the development of the underlying technology and its application scenarios. The first is its innovativeness – the degree to which an application is new to the world. The more innovative it is, the more effort is required to make its functionality understandable to users. The second dimension is complexity, represented by the level of ecosystem coordination – how many subjects are needed to use the technology and how diverse they are to create value together. For example, a social network with only one user is useless; it is only valuable if all your relationships are on that social network. The other users of the application must work together to create value for the participants. For many blockchain applications, the reasoning is the same. And as these applications increase in scale and impact, their use will bring about significant institutional change.

We developed a framework to analyze the development of innovation according to the two dimensions mentioned above, placing it in four quadrants. Each quadrant represents a stage in the development of the technology. Understanding where blockchain innovation falls in the quadrant can help company executives understand the challenges facing blockchain and the level of coordination and consensus required to adopt blockchain technology, as well as the legal and regulatory efforts necessary to do so. It can also illustrate what processes and infrastructure are still needed to drive the adoption of an innovation. Managers can use it to assess the state of blockchain development in any industry and to evaluate the problems companies have with strategic blockchain investments.

standalone applications

in the first quadrant are less innovative and less difficult to coordinate, offering better, lower-cost, more professional solutions. email, a low-cost alternative to phone, fax and traditional letter writing, is a standalone application of TCP/IP technology (even if its value increases with the number of users). Email, a low-cost alternative to phone, fax and traditional letter writing, is also a stand-alone application of TCP/IP technology (even though its value increases with the number of users). Bitcoin is also in this quadrant. Even at its early stage of development, Bitcoin is only available as an alternative payment method for a very small percentage of the population. (You can think of it as a complex email that transmits not just information, but actual value.) At the end of 2016, Bitcoin’s total market cap was estimated to reach $92 billion. With an overall global payments market of $411 trillion, Bitcoin is still very small, but it is growing rapidly and is becoming increasingly important in instant payments and foreign exchange and asset trading, areas where the current financial system has limitations.

Local applications

The second quadrant of innovation is relatively novel but requires only a limited number of users to create value, so it is relatively easy to spread this type of technology. If blockchain follows the path of network technology, we can expect blockchain innovations to develop local private networks through independent applications so that multiple organizations can be connected through a distributed ledger.

Many of the initial private blockchain projects have largely emerged in the financial sector, where there are fewer companies within the network so that there is not much coordination cost. Nasdaq is working with Chain.com, a blockchain infrastructure provider, to provide the technology to process and confirm financial transactions. Bank of America, JPMorgan, New York Stock Exchange, Fidelity Investments, and Standard Chartered are testing blockchain technology in many areas such as trade finance, foreign exchange, cross-border settlement, and securities settlement to replace paper-based manual transaction processing. The Bank of Canada is testing a digital currency called CAD coin for inter-bank transfer services. We expect private blockchain to continue to evolve to provide specific service features for various industries.” The third quadrant of

replaces

contains applications that are relatively less innovative, but require significant coordination efforts because they involve widespread public use. These innovations are intended to replace traditional business models, so these applications face many obstacles; not only do they require more coordination, but the processes they are intended to replace are also very mature and deeply integrated with today’s businesses and institutions. Such examples include cryptocurrency – a new type of currency that originated with Bitcoin payment technology. The key difference is that cryptocurrencies require all parties to a currency transaction to embrace the technology, challenging governments and mechanisms that have long been part of traditional regulatory regimes. Consumers will also have to change their behavioral patterns to understand how to use in order to realize the potential of cryptocurrencies.

A recent experiment at MIT highlights the challenges facing the digital currency system. 2014 MIT Bitcoin Club provided $4,494 undergraduate students at MIT with $100 in bitcoin. Interestingly, 30 percent of the students didn’t even sign up to receive the free money, and 20 percent of those who did signed up exchanged their bitcoins for cash within weeks. Even technology-obsessed students had a hard time understanding how and where to use bitcoin.

One of the boldest alternative blockchain applications is Stellar, a nonprofit project that aims to provide affordable financial services, including banking, micropayments, and money transfers, to groups that have never had access to them. stellar has its own virtual currency, lumens, that also allows users to insure in its systemStellar has just started to focus mainly on the African region, especially Nigeria, the largest economy in Africa. There Stellar is already gaining widespread adoption among its target user base and at a very low cost. But the future is not smooth, as there are many difficulties in coordinating the industry chain. While adoption by the underlying population is proof of Stellar’s viability, to become a banking standard it will need to influence government policy and convince central banks and large corporations to use it. This could take several years of hard work.” The

change

is the most innovative application in the last quadrant and if successful will change the nature of the economic, social and political system. This will involve the coordination of many actors and the consistent support of large institutions in terms of standards and processes. The widespread application of this innovation will require significant changes in social, legal and political institutions.

“smart contracts” are the most revolutionary blockchain application available. Payments and transfers of currency or other assets are automatically completed when pre-agreed conditions are met. For example, a smart contract will automatically pay the supplier as soon as the goods are delivered. A company can indicate on the blockchain that certain types of goods have been delivered – or a product with GPS location on it will automatically complete a location update, which in turn will trigger a payment to occur. We are seeing early pilot projects of such self-executing contracts in corporate finance, banking and digital equity management.

The implications of this are exciting. Companies will be built on top of contracts, from registration to buyer-vendor relationships to employee relationships. What will happen to traditional corporate structures, business processes and intermediaries like lawyers and accountants if contracts are automatable? What would happen to managers? Their roles would fundamentally change. Before we get too excited, we must remember that we are still decades away from widespread adoption of smart contracts. This cannot become a reality without the support of big business. A great deal of coordination and clarification is needed regarding the design, validation, implementation and execution of smart contracts. We believe this will take a long time. And the technical challenges, especially the security issues, are daunting.

Ways to guide blockchain investments

How should company executives consider adopting blockchain technology within their organizations? Our framework can help companies identify the right opportunities.

For many companies, the easiest is the standalone adoption model, which minimizes risk because it is the least innovative and involves little third-party coordination. One strategy is to use bitcoin as a payment mechanism. The bitcoin infrastructure and marketplace is already very mature, and adopting a virtual currency will also require many functional departments to strengthen their blockchain technology application capabilities, including IT, finance, accounting, sales and marketing. Another low-risk approach is to use blockchain internally as a database application, such as managing physical and digital assets, recording internal transactions, and verifying identities. This is particularly useful for companies that want to collaborate across multiple internal databases. Testing standalone applications will help companies develop the skills to meet the requirements of more advanced application models in the future. And it is also the emergence of cloud technology blockchain services from startups and large platforms such as Amazon and Microsoft that makes testing increasingly easy.

Localized applications are a natural choice for enterprises going forward. We are also seeing many companies now investing in private chain networks, and many of these projects have only a very short-term impact. For example, financial institutions are finding that the limited number of trusted counterparties in the private chain networks they develop can significantly reduce transaction costs.

Enterprises can also use localized applications to solve specific problems in cross-border transactions. For example, many companies are using blockchain to track goods in complex supply chains. This is already being used in the diamond industry, where gems can be tracked throughout their journey from mine to consumer. This technology is now available.

Developing alternative applications requires careful planning, as today’s solutions are difficult to replace. One approach is to focus on alternative models that do not require end users to change their behavior, proposing alternatives to the original expensive and unattractive solutions. At the same time, the alternative must have the same functionality as the traditional solution and facilitate easy acceptance and adoption by the ecosystem.First Data’s development of blockchain-based gift cards is an example of a well-thought-out alternative product. By using blockchain to track the flow of currency within an account, retailers offering gift cards to consumers do not need to rely on external payment processors, which can significantly reduce the cost per transaction and improve security. These new gift cards even allow for the transfer of balances and transaction privileges between merchants.

Blockchain can dramatically reduce transaction costs and reshape economic development models.

Disruptive applications are still a long way off. But it makes sense to assess the potential for disruptive applications now and to strengthen early investments. Disruptive applications are very impactful when combined with new business models where value is created and captured in a different way than it is today. Such business models are difficult to adopt, but can drive the emergence of companies of the future.

Consider how law firms will have to change to adopt smart contract technology. They will need to develop new skills in software and blockchain programming. They may also have to rethink their hourly fee models and consider either a transaction fee model or a contract custody fee model, to name just two of the possible models. Whatever approach is taken, company executives must be sure they understand and test the impact of the business model before making changes.

transformative scenarios will come last, but they can deliver considerable value. They will have a profound impact in two areas: large-scale public identity systems for entry passport control functions, and algorithm-driven decision making in complex financial transactions that prevent money laundering processes and multiple parties from participating. We expect these applications to be available for at least a decade, if not longerThe

transformative applications will also drive the emergence of new platform-based enterprises that will coordinate and manage new ecosystems.

transformative applications will also drive the emergence of new platform-based enterprises that will orchestrate and manage new ecosystems. These companies will be the next generation of Google and Facebook. It will take patience to make this happen. While it’s too early to start thinking about large-scale investments, it’s still worthwhile to develop the necessary foundation – tools and standards – for it.

Conclusion

In addition to providing a reference point for the popularity of blockchain, TCP/IP has laid the foundation for its development. tcp/ip is now ubiquitous, and blockchain applications are built on top of a digital data, communications and computing infrastructure, which reduces the cost of experimentation and allows new usage scenarios to quickly emerge.

Using our framework, company executives can figure out where to start to prepare their companies for future blockchain applications. They need to ensure that their employees understand blockchain and are able to develop company-specific applications and invest in blockchain infrastructure in the four quadrants we’ve built.

But looking at the path of TCP/IP development, the timing, the barriers to technology adoption, the complexity of the technology, etc., company executives should carefully consider the risks involved in blockchain testing projects. To be more clear, starting small is the better way to go. But the size of the investment should depend on the current state of the company and the industry. Financial institutions have done a good job of adopting blockchain technology. Manufacturing is not ready.

Regardless, blockchain is likely to impact your business, and the biggest issue is time.