Blockchain? The pros and cons

Blockchain has become the buzzword of the year 2018.
Apparently, simply adding it to a start-up elevator pitch helps convince more people that they should invest.
But do investors understand what blockchain technology is about?

This is the first blog entry of a series of posts regarding Technology, Innovation and Management #ccTIM.
The main question is, why should I use blockchain in marketing or sales of a Fast Moving Consumer Product (FMCP)?

The fact that people are not always sure what it means is illustrated by Absatzwirtschaft, a monthly publication. Its October 2018 issue carries a special section on blockchains. While it explains a few things and lists important facts, some portions remain confusing to the uninitiated.

This blog entry will clarify some facts about blockchain for you.

Understand what matters

Blockchain allows a transaction to be permanently recorded on a database shared between computers, without relying on a third party to authenticate or process it.

What makes it attractive for consumers as well as companies is that immutability and security are written into blockchain. As well, because no single authority is in charge of the ledger, no one may remove entries or fiddle with them.

Here are three examples:

  • Bitcoin, a cryptocurrency that wants to eliminate the middleman in finance, such as banks.
    It runs on a blockchain that has been used since 2009 to underpin the working of the currency.
    Bitcoin offers one particular application of blockchain technology, a peer to peer electronic cash system that enables online Bitcoin payments.
  • Ethereum aims to bypass online giants such as Amazon, eBay and Facebook.
    It wants to achieve this laudable objective by allowing automated agreements to guarantee users a service.
  • Vaultsecurity.io aims to help those who suffer a break-in or a fire in their home.
    Vaultsecurity creates a permanent, trusted database of valuables that anyone may access with a secure key. In turn, selling lost or stolen goods becomes very difficult, if not impossible.

Bitcoin blockchain is used to track ownership of digital currency (bitcoins). In contrast, Ethereum blockchain focuses on running the programming code of any decentralized application. Other open source systems include Hyperledger, which has five projects.

In contrast to Ethereum, Hyperledger Fabric (one of the five projects mentioned above) provides different roles to the participants within the network. Examples are Peers (e.g., customers), Endorsers (e.g., a jewellery store), and Orderers (e.g., a manufacturer).

The internet is to email what a blockchain is to Bitcoin or Vaultsecurity. A big electronic system, on top of which you can build applications. Currencies, such as bitcoin, are just one possible application.

Blockchain depends on distributed computing and cryptography.
Blockchain depends on distributed computing and cryptography.

Key questions for designing a blockchain are listed below. We need to figure out what we are trying to do, the value we want to capture, and for whom this is useful.

When solving a problem with a blockchain, it needds to be smarter, better, and more user-friendly than otherwise possible.

What are we trying to do? What value do we want to capture? For whom is this of use?
Record transaction Information and knowledge about what changed hands Clients
Track transaction Attribution and who is responsible Suppliers
Verify transaction Access or permission to records Manufacturer of goods
Aggregate transaction Ownership Creditors or investors
Reputation and trust Public agencies
Contracts Employees
Transaction ledger

Table. Adapted from Felin, Teppo and Lakhani, Karim (Fall 2018). What problems will you solve with blockchain. MIT Sloan Management Review, p. 36. Retrieved 2018-10-20 from http://sloanreview.mit.edu/x/6015

Besides the more general questions above we feel it is necessary to answer the seven questions below.

Answering these questions is critical

Before you start considering working with a blockchain, it is advisable to answer seven questions that will help you decide whether a blockchain is the best way to go (listed below).

7 questions to be answered before developing a blockchain
  1. Do multiple parties share data?
    Example: Manufacturer, distributor, and retail customer.
  2. Do multiple parties update data?
    Example: Customer updates sale to another collector, both inform distributor and manufacturer.
  3. Is there a requirement for verification?
    Example: Manufacturer doing repairs wants to know if person claiming ownership of an asset does rightfully own the asset.
  4. Can intermediaries be removed and thereby reduce cost and complexity?
    Example: Can Amazon, eBay or others be avoided to possibly save costs, and keep customer data to ourselves.
  5. Does a blockchain possibly help comply with, if not exceed, General Data Protection Regulation (GDPR) (2018-05-25) and the California Consumer Privacy Act – Assembly Bill No. 375, CHAPTER 55 (2018-06-27) requirements?
    Example: Can a wealthy client protect their assets while being assured their identity is protected from general public knowledge (e.g., public figure or movie star).
  6. Does the blockchain help reduce trade in stolen goods and fake luxury items?
    Example: How can a potential buyer be sure that jewellery, antiques, or a luxury product are not stolen or fakes?
    Recording, tracking, verifying, and aggregating of information about an asset can further reduce the risks as outlined here.

Resources: Microsoft, DrKPI, #MCLago White Paper about the GDPR (Tools) Data Protection

With blockchains, no single one-size-fits-all approach is useful.

Cyberspace and Security: Blockchain
Cyberspace and Security: Blockchain

Initial Coin Offering (ICO): One way to use a blockchain

The scalability and user-friendliness of some applications may not be satisfactory. For instance:

  • Ethereum can currently process fifteen transactions per second, while
  • Visa can handle 45,000 transactions per second.

The main benefit of using blockchain is for recording, tracking, verifying, and aggregating of information.

For instance, Initial Coin Offering (ICO) requires a transaction ledger to allow a company and an investor to take advantage of an alternative fundraising mechanism. With an ICO, a start-up can issue their own crypto tokens and get needed capital.

One main difference between an Initial Public Offering (IPO) and an ICO is that the latter is similar to crowdfunding with two differences:

  1. No fee has to be paid to a platform like Kickstarter for the amount being raised, and
  2. token holders do not own any equity in the company but may get the product faster or be paid with product. The company has no real obligation to the contributor to deliver on their promises (ICO example, Lake Diamond CNN video – YouTube).
Lake Diamond uses an Initial Coin Offering (ICO) to raise capital without forcing the founders to give up equity.
Lake Diamond uses an Initial Coin Offering (ICO) to raise capital without forcing the founders to give up equity.

What is your opinion?

Distributed ledger technologies are collectively known as blockchain. While they offer great opportunities, we have to separate the wheat from the chaff of hype. We hope this blog entry helps you in this process.

Have these explanations helped you so far? Feel free to leave a comment below.

  • Do you have experience with crypto tokens?
  • Is your company trying to use blockchain technology to make its processes faster, more efficient or transparent for its customers or suppliers?
  • Are you planning to use a blockchain as a customer soon?
  • What do you like or dislike about blockchains?

Please share this entry on social media using this link: https://blog.drkpi.com/?p=4689

Urs E. Gattiker

Professor Urs E. Gattiker - DrKPI is corporate Europe's leading social media metrics expert (see his books). He continues to work with start-ups. Urs is CEO of CyTRAP Labs GmbH and President of the Marketing Club Lago, a member of the German Marketing Association (DMV).

2 thoughts on “Blockchain? The pros and cons

    • 26. October 2018 at 9:06
      Permalink

      Dear Julian

      Thanks so much for your input… yes you co-authored a very interesting paper on this topic (see your link).

      In e-mobility, processing the many informations that need to be handled are such as:

      – traffic lights
      – where to go to get recharged
      – parking
      – etc.

      Whilst all these activities can be handled by a blockchain, including billing me via the e-wallet as proposed in your paper, it takes processing power. Of course, this does not come cheap a whole battery of servers is need and system redundancy is an issue.

      I still remember, somebody telling me:

      “Imagine just 50 Mio cars and how much data needs to be processed, such fees as those accrued for

      – road (e.g., France, Italy, Singapore),
      – parking,
      – re-charging the car battery, and
      – much more.”

      We will see how this develops. Nevertheless, I am certain that it is a very interesting space to be and yes, blockchains (e.g., cryptography combined with distributed computing) will change how we produce, sell and service product.

      Have a great weekend.

      Urs
      #BrandBuzz
      #MetricsThatMatter

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *