The economics of enterprise Blockchain: out of the jungle!

For just about any economic activity, various blockchain use cases have been imagined by solution providers, startups, and more and more often by big firms.

Can they actually have a meaningful impact on the enterprise, its costs and benefits? Not surprisingly, with limited blockchain track record globally, there has been very little research to date on this topic.

We have seen use cases covering a whole spectrum from more or less feasible, to revolutionary, sometimes far-fetched/complex/expensive (in other words “undoable”).

Regardless of the ambition, the objective has always had as driver to improve a current process, operating model or current state of business.

While a lot of sectors are targeted and countless surveys published, the implementation by larger organizations is often carried out by one particular function (let’s say, supply chain,  or procurement) and implements one or several processes within a company. It’s never or rarely enterprise-wide.

There are three major categories of usage of the blockchain from an economic model perspective

By economic model, we mean a framework answering to the question: “what are the benefits of implementing the blockchain in my organization” ? This is a question that business leaders ask us a lot.

The use of blockchain can provide benefits to all industries, most of functions and processes. It can be very disruptive or seamlessly integrated as background tracing solution. However from the perspective of the economic value for an organization, we look at the use cases as “models of use” of the blockchain. In our analysis, we can structure into 4 models of use:

Case #1 – Transparency and Traceability of processes and goods

In this case, the blockchain is used as tamper-proof of execution of a certain activity. Those include for example KYC/KYS, KYI (Know Your Customer, Your Supplier, Intermediaries, etc …) and most of multi-stakeholder processes where a proof of execution is needed. A classic case is finding evidence in the form of documents that a certain activity was completed as requested by a company policy, ISO standard, or other requirement.
Another case is in the physical world: dealing with the shipment of goods for example. It is the efficiency of the tracking process itself that matters: who did what, when, why and how.
The economic model boils down to the value this transparency brings. The value can be calculated by articulating several aspects:

  • The time and resources saved when performing activities that aim at providing this transparency or traceability (think of an audit activity). For example, the need for a clerical position at 50% to manage documents to deal with problems can be reduced to 25% with more efficient transparency.
  • The potential benefits of using the transparency or traceability to deliver a paid service. If you can deliver a service faster and more reliably, there might be a case for monetizing it.
  • Add the cost of implementing, cost of change management, cost per transactions or user. As such, it is not very different from any other enterprise software.
  • The costs of deviating from the normal execution. For example: where is a lost shipment between China and Amsterdam? How much paperwork do you need to gather to manage a customer registration?

Case 2# – Removal of Intermediaries

In this classic blockchain case from education books, the distributed nature of the blockchain with all its benefits replaces an intermediary that has a cost in the transaction and assumed not to bring a huge value to the transaction. Consider for example the blockchain allowing to refund in part real estate agent/broker fees in cryptocurrency to buyers. It would have the potential advantage of decreasing the cost of the transaction to the buyer. This is one basic token economics example, many other cases can be found through several solution providers and should be analyzed individually.
In the case of removal of intermediaries, the economic model here needs a few assumptions first:

  • Who provides the solution if not the former intermediary? We assume it is the former intermediary who provides it for the sake of clarity.
  • In order to compare apples to apples, we need to observe equal outcomes for an equivalent job without the intermediary. For example, selling a house without brokerage fees still effectively transfers the ownership with same rights and features.
  • Then once we agree on these assumptions, again the economic model boils down to:
    • Benefits are strongly linked to the token economics model: if I can recover part of my costs in crypto, I have effectively saved something if the crypto itself allows me to access to other valuable good or services. Calculating this can be tricky.
    • Changing the current system to a blockchain-based system comes with its own change management costs as well: infrastructure, service, people, operations, from the perspective of an established player.

Case #3 – Tokenization (Security tokens)

This last case is very different from the others. The idea is to look at the tokenization of assets or debt that have intrinsic value. In short, this implies to fractionate certain balance sheet elements, like a building, or company capital, and issuing the fractions in the form of tokens. A token issuer can be for example a company tokenizing a real estate construction. Think of a real estate developer issuing a tokenized bond backed by its real estate construction. Such issuer may benefit from several advantages. First, it is the access to a larger pool of buyers that could benefit from financial instruments otherwise difficult to acquire (think of real estate for example). The token issuer may therefore benefit from faster cash inflow when it sells tokens on the primary market. He would also retain ownership of the property, further increasing attractiveness of the model. Second, it is the enablement of a secondary market with theoretical liquidity that wouldn’t exist otherwise.
Implementing a tokenization solution comes with its own costs and construct: economic model (yield, fees structure, etc), regulatory & legal fees, corporate and tax structuring, technology, and deployment in the market. Economically speaking, the implementation of a tokenization project will follow its own economic model based on the underlying.

 

Immaterial advantages should be considered in most of the cases above. Those include a better protection against identified risks, a higher capacity to react to problems, swifter execution of some activities, the ability to build trust and turn it into commercial advantage, innovative go-to-market model in the case of tokenization. Those advantages are arguably hard to calculate.

 

We have left aside utility tokens as proposed by a number of ICOs (Initial Coin Offering). Nowadays, less and less relevant ICOs are performed. The few examples of deployment of utility tokens do not lead us outside of the current framework.

…. and then what?

The examples above are only simplified versions of a more complex reality. What we have learned from studying dozens if not hundreds of use cases is that we can’t generalize. Estimating the benefits or costs for a sector in general make little or no sense. An approach based on the cost of activities, direct material benefits, costs of implementation and operation are the main drivers. Please reach out to discuss your specific use case.

 

Thanks to Ugo Mercier who contributed to this article through his research and Nestor Morgandi.

Related Posts