Contracts, transactions and their records are an important part of our socio-economic, legal and political systems. They protect our assets and define the boundaries of the organization. They form and authenticate our personal identities and various historical events. They manage a range of activities between countries, organizations, communities and individuals. They direct all administrative and social activities. But these critical tools, and the bureaucracy that governs them, have not kept pace with the digital transformation of the economy. It's like an F1 car suddenly encountering a big jam. In a digital world, our approach to regulation and administrative control must change. ?

Blockchain has the potential to solve this problem. As the core supporting technology of Bitcoin and other virtual currencies, blockchain is an open, distributed ledger that can effectively record transaction records between transaction parties, and is verifiable and permanently saved. The ledger itself can be programmed to automatically trigger transaction completion. ?

Five basic principles of blockchain technology

1. Distributed database?

Every party on the blockchain can obtain all data and Its complete history. No one party controls the data or information. Each party can directly verify the records of all parties to the transaction, without the need for an intermediary. ?

2. Point-to-point communication?

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

3. Limited transparency?

Users who have the right to enter the system can see each transaction and the transaction value. Each node or user on the blockchain has a unique address consisting of letters and numbers, which can be used as the user's identity. Users can choose to remain anonymous or disclose their identity to others. Transactions occur between addresses on the blockchain. ?

4. Records cannot be changed?

Once the transaction results enter the database, the account information will be updated accordingly, and the records cannot be changed, because this information is mutually exclusive with all previous transaction records. Association (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, ordered in chronological order, and visible to everyone else on 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 implemented through programming. All users can set algorithms and rules so that transactions can be automatically triggered between nodes. ?

With blockchain technology, we can imagine a new world where contracts are stored in a transparent and shared database in the form of digital programming and will not be deleted or tampered with. , was revised. In such a world, every agreement, every process, every task and every payment will have a digital record and digital signature that can be identified, verified, stored and shared. Intermediaries such as lawyers, brokers and bankers are no longer necessary. Individuals, organizations, machines and algorithms are free to interact and transact with each other frictionlessly. This is the endless potential brought by blockchain. ?

In fact, almost everyone has heard that blockchain will have a revolutionary impact on enterprises and will redefine enterprises and the economy. While we remain enthusiastic about the potential of blockchain, we are also concerned that it may be overblown. It’s not just security issues (like the collapse of a Bitcoin exchange in 2014 and recent hacks) that worry us. The experience of studying technological innovation tells us that if there is a blockchain revolution in the future, there will be many obstacles - technical, governance, organizational and social obstacles. Reckless application of blockchain technological innovations without a true and thorough understanding of blockchain is likely to lead to a big mistake. ?

We believe it will take many years before blockchain can truly bring changes to businesses and governments. Because blockchain is not a "disruptive" technology, disruptive technology can impact traditional business models with low-cost solutions and can quickly replace traditional enterprises. We believe that blockchain is a fundamental technology: one with the potential to create new foundations for our economic and social systems. But its impact is widespread, and it will take decades for blockchain to penetrate economic and social infrastructure. The process of blockchain popularization will be gradual, and this process and its strategic significance will be the focus of this article. ?

Patterns of technology adoption

Before discussing blockchain strategy and investment, let’s recall what we know about the technology adoption process below, especially the adoption of other underlying technologies. One of the most relevant examples is the adoption of distributed computer network technology, namely the TCP/IP protocol, which laid the foundation for the development of the Internet. ?

TCP/IP first appeared in 1972 and gained widespread attention in a single use case: it emerged as the basis for sending emails between researchers on the ARPAnet, which was developed by the U.S. Department of Defense The predecessor of the commercial Internet.

Before TCP/IP, the communication system architecture was based on "circuit switching". The connection between two parties or two machines had to be preset and maintained through a switch. To ensure that any two nodes can communicate, telecom service providers and equipment manufacturers have invested billions of dollars in dedicated lines. ?

TCP/IP completely changes the above model. The new protocol digitizes information and breaks it into many small packets, each of which includes address information. Once these packets are released into the network, they can take any route to reach the recipient. Data sending and receiving points in the network can decompose the data packets, reassemble the data 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 subject responsible for maintenance and updates. ?

Traditional telecommunications companies and related companies are skeptical of TCP/IP. Few imagine that data, information, audio and video can be established under a new system, and few imagine that related systems will be very secure and develop rapidly. However, from the late 1980s to the 1990s, more and more companies, such as Sun, NeXT, HP, and Silicon Graphics, used TCP/IP to develop internal local area networks within the company. In doing so, they developed technologies that transcended email and increasingly replaced traditional LAN technologies and standards. As enterprises adopt these newly developed technologies and tools, their production efficiency has been greatly improved. ?

In the mid-1990s, the emergence of the World Wide Web made TCP/IP widely used. Newly created high-tech companies began to provide the "tools"—the hardware, software, and related services necessary to connect to and exchange information with today's public networks. Netscape commercialized browsers, web servers, and other tools and components. Sun Corporation promoted the development of application programming language-Java. With the exponential growth of information on the Internet, the emergence of Infoseek, Excite, AltaVista, and Yahoo are all guiding users to use TCP/IP technology. ?

Once this basic infrastructure is widely accepted, a new generation of enterprises can seize the opportunity brought by low-cost Internet to create more Internet services, which in turn will help to There are alternative business models. CNET brings news online. Amazon sells more books than any brick-and-mortar bookstore. Priceline and Expedia make buying air tickets easier and the entire buying process more transparent. These new entrants are expanding their business at very low costs, causing traditional businesses such as newspapers and physical retail stores to feel unprecedented pressure. ?

Relying on the widespread presence of the Internet, companies create novel and revolutionary applications that are enough to fundamentally change traditional business models and create value. These enterprises are built on new P2P architectures and generate value by coordinating users of distributed networks. Consider how eBay transformed online retailing with its auction model, Napster transformed the music industry, Skype transformed telecommunications, and Google transformed web search by leveraging the links users form to provide more precise search results. ?

Many companies are already using blockchain to track goods along the supply chain. Ultimately, it took more than 30 years for TCP/IP to gain widespread acceptance—used alone, locally, as a replacement, and as a catalyst for transformation—and reshape our economy. Today, more than half of the world's most valuable listed companies have Internet-driven, platform-based business models. The foundations of our economy have fundamentally changed. Physical assets and proprietary intellectual property are no longer guarantees of competitive advantage; companies that lead economic development can play a key role, especially those who organize, influence, and coordinate extensive networks of communities, users, and organizations. ?

New system

Blockchain—the P2P network at the top of the Internet—entered people’s horizons as the core foundation of Bitcoin in October 2008. Bitcoin is a virtual A monetary system that does not issue currency, transfer ownership, and confirm transactions through a central authority. Bitcoin is the first real-world application of blockchain technology. ?

The similarities between blockchain and TCP/IP are obvious. Just like email allows people to exchange information, Bitcoin allows people to conduct transactions. The development and maintenance of blockchain is open, distributed, and shared - just like TCP/IP. A group of volunteers around the world maintain its core software. Like email, Bitcoin received enthusiastic support from the beginning, but only from a relatively small number of people. ?

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

First, let’s take a look at how current businesses operate. Recording transactions is a core task that every business must do.

These records track past activities and results and provide guidance for the future. They can provide insight into not only how a business works internally, but also how the business is connected to the outside world. Every business or organization will have its own records, and these records are private and confidential. Many companies do not have a general ledger record of all company activities; instead, all records are scattered within various branches or departments within the company. The problem is that reconciling transactions between individuals and private ledgers takes a lot of time and is also error-prone. ?

For example, a typical stock trade can be completed in microseconds without human intervention. However, settlement — transferring ownership of the shares — can take up to a week. This is mainly because no party has access to other people’s ledgers, and there is no way to automatically prove the owner of an asset, nor to automatically transfer assets. Instead, many intermediaries are needed to ensure the existence of the asset and to record the transfer of ownership of the asset. ?

In a blockchain system, ledgers can be replicated in many identical databases. Each party will have a set of data, and stakeholders will also maintain records. When one party's data changes, all other copies of the ledger are updated at the same time. Whenever a transaction occurs, the asset type and value of the transaction are recorded in all ledgers. No third-party intermediary is required to prove or transfer ownership. If a stock transaction occurs on a blockchain system, its settlement will be completed within seconds, is extremely secure, and can withstand verification. (The vulnerability in the hacks that attacked Bitcoin exchanges did not lie in the blockchain itself, but in the separate systems that used the blockchain to connect the parties.)?

Blockchain is gaining widespread acceptance Framework

If Bitcoin is like early email, is it still decades before blockchain reaches its full potential? In our opinion, the answer is yes. We can’t predict exactly how many years it will take for change to occur, but we can guess what applications will emerge first and how widespread blockchain acceptance will eventually become a reality. ?

How does basic technology gain widespread acceptance

The popularization of basic technology usually has four stages. Each stage depends on the innovativeness of the application and the complexity of the coordination effort. Less innovative and less complex apps will be accepted first. More innovative and complex applications will take decades to become widely accepted, but they can have a revolutionary impact on the economy. TCP/IP technology, introduced by ARPAnet in 1972, has reached a period of transformation, but blockchain applications are still in the early stages of development. ?

In our analysis, history shows that there are two dimensions that will affect the development of basic technologies and their application scenarios. The first is its innovativeness—how new an app is to the world. The more innovative it is, the more effort it will take for users to understand its functionality. The second dimension is complexity, represented by the level of ecosystem coordination—how many agents are needed to use the technology and how diverse they are to collectively create value. For example, a social network is useless with only one user; it is valuable only if all your relationships are on the social network. Other users of the application must work together to create value for participants. For many blockchain applications, the principle is the same. And as these applications increase in scale and impact, their adoption will bring about major institutional changes. ?

We have developed a framework to analyze the development of innovation according to the two dimensions mentioned above, integrating it into four quadrants. Each quadrant represents a stage of technology development. Understanding which quadrant blockchain innovation falls in can help company executives understand the challenges faced by blockchain, as well as the level of coordination and knowledge required to adopt blockchain technology, as well as the necessary Legal and regulatory efforts. It also illustrates what processes and infrastructure are needed to drive widespread adoption of an innovation. Managers can use it to evaluate the status of blockchain development in any industry and evaluate the company's problems with strategic investments in blockchain. ?

Independent applications

In the first quadrant are applications that are less innovative and less difficult to coordinate, and can provide better, lower cost, and more professional solutions . Email is a low-cost communication method that replaces telephone calls, faxes, and traditional letter-writing methods. It is also an independent application model of TCP/IP technology (even though its value increases with the increase in the number of users). Bitcoin is also in this quadrant. Even in its infancy, Bitcoin is only an alternative payment method for a small number of people. (You can think of it as a complex email that transmits not just information, but actual value.) At the end of 2016, the total market value of Bitcoin was expected to reach $92 billion. The total global payment market size has reached 411 trillion US dollars. The scale of Bitcoin is still very small. However, Bitcoin is developing rapidly and is becoming more and more important in instant payment, foreign exchange and asset transactions. In these areas, the current financial system has limitations. sex. ?

Partial application

Innovations in the second quadrant are relatively novel but only require a limited number of users to create value, so it is relatively easy to popularize this type of technology. .

If blockchain follows the development path of network technology, we can expect blockchain innovation 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 basically appeared in the financial field, and there were relatively few companies within the network, so there was not much coordination cost. Nasdaq is partnering with Chain.com, a blockchain infrastructure provider, to provide related technology for processing and confirming financial transactions. Bank of America, JPMorgan Group, the New York Stock Exchange, Fidelity Investments, and Standard Chartered Bank are testing blockchain technology in many areas such as trade finance, foreign exchange, cross-border settlement, securities settlement, etc. in order to replace paper-based manual transaction processing processes. The Bank of Canada is testing a digital currency called CAD Coin for interbank transfer services. We expect private blockchains to continue to evolve and provide specific service functions for various industries. ?

Alternatives

The third quadrant contains applications that are relatively less innovative but require significant coordination efforts because they involve widespread public use. The purpose of these innovations is to replace traditional business models, so these applications will face many obstacles; not only do such innovations require more coordination, but the processes they are replacing are also very mature and deeply integrated with current enterprises and systems. Examples include cryptocurrencies - a new type of money that originated from the Bitcoin payment technology. The key difference is that cryptocurrencies require all parties to a currency transaction to accept the technology, which challenges governments and mechanisms that have long been under traditional regulatory systems. Consumers will also have to change their behavior and understand how to use cryptocurrencies to realize their potential. ?

A recent MIT experiment highlighted the challenges facing the digital currency system. In 2014, the MIT Bitcoin Club provided $100 in Bitcoin to 4,494 MIT undergraduates. Interestingly, 30% of students did not even register to receive this free money, and 20% of students who registered to receive it converted their Bitcoins into cash within a few weeks. Even tech-obsessed students have trouble understanding how and where to use Bitcoin. ?

One of the boldest alternative blockchain applications is Stellar, a non-profit project that aims to provide affordable financial services to those who have never enjoyed financial services, including banks. Business, micro payment, remittance. Stellar has its own virtual currency, lumens, and also allows users to save other assets in its system, including other currencies, airtime, and digital credits. Stellar initially focused on Africa, especially Nigeria, Africa’s largest economy. There Stellar has gained widespread adoption among its target user groups and at very low cost. But the future will not be smooth sailing because there are many difficulties in industrial chain coordination. While grassroots adoption is proof of Stellar’s ??vitality, to become a banking standard it will also need to influence government policy and convince central banks and large corporations to use it. This can take years of hard work. ?

Change

In the last quadrant are the most innovative applications that, if successful, will change the nature of economic, social and political systems. This will involve the coordination of many entities, and it will also require unanimous support from large institutions in terms of standards and processes. The widespread adoption of such innovations will require significant changes in social, legal and political institutions. ?

"Smart contracts" are currently the most revolutionary blockchain applications. Payments and transfers of currency or other assets are automatically completed when pre-agreed conditions are met. For example, as long as the goods are delivered, the smart contract will automatically pay the supplier. A company can indicate on the blockchain that a certain type of shipment has been delivered—or that a product has GPS functionality that automatically updates its location, which in turn triggers a payment. We are seeing early pilot projects of this kind of self-enforcing contracts in corporate finance, banking, and digital equity management. ?

The implications of this are exciting. The company will be built on contracts, from registration to buyer-supplier relationships to employee relationships. If contracts were self-executing, what would happen to traditional corporate structures, business processes, and intermediaries like lawyers and accountants? What will happen to managers? Their roles will fundamentally change. Before we get too excited, we must remember that we are still decades away from widespread adoption of smart contracts. This would not be possible without the support of big business. There is a lot of coordination and explanation required regarding the design, verification, implementation and execution of smart contracts. We believe this will take a long time. And the technical problems, especially the security issues, are also very daunting. ?

How to guide blockchain investments

How should company executives consider adopting blockchain technology within their enterprises? Our framework helps businesses identify the right opportunities. ?

For many enterprises, the easiest thing is the independent application model, which minimizes risks because this model is the least innovative and rarely involves third-party coordination issues. One strategy is to use Bitcoin as a payment mechanism.

The Bitcoin infrastructure and market are already very mature, and the adoption of virtual currency will also require many functional departments to strengthen their blockchain technology application capabilities, including information technology, finance, accounting, sales and marketing, etc. Another low-risk approach is to use blockchain internally for database applications, such as managing physical and digital assets, recording internal transactions, and verifying identities. This is particularly useful for businesses that want to collaborate between multiple internal databases. Testing stand-alone applications will help companies develop the skills to meet the requirements of more advanced application models in the future. And it is precisely because of the emergence of cloud technology blockchain services from startups and large platforms such as Amazon and Microsoft that testing is becoming increasingly easier. ?

Localized applications are the natural choice for enterprises in the future. We have also seen that many companies are now investing in private chain networks, and many projects have only a very short-term impact. For example, financial institutions have found that the private chain networks they develop have a limited number of trustworthy counterparties, which can greatly 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 used in the diamond industry, where gemstones can be tracked from mine to consumer. This technology already exists. ?

Developing alternative applications requires careful planning because current 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 original expensive and unattractive solutions. At the same time, alternatives must have the same functionality as traditional solutions and be easy for the ecosystem to accept and adopt. The gift card developed by First Data based on blockchain technology is an example of a well-thought-out alternative product. Retail companies that provide gift cards to consumers can use blockchain to track the flow of currency within accounts without relying on external payment processors, which can significantly reduce the cost of each transaction and improve security. These new gift cards even allow balance and transaction privileges to be transferred between merchants. ?

Blockchain can significantly reduce transaction costs and reshape the economic development model. ?

Disruptive applications are still far away. But it still makes sense to assess the likelihood of disruptive applications and step up early investments now. Disruptive applications are very influential when combined with new business models in which value creation and capture are different from the current methods. This business model is difficult to adopt, but it can drive the emergence of future companies. ?

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

Transformative scenarios emerge last, but can bring 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 preventing money laundering and complex financial transactions involving multiple parties. We don’t expect these applications to be widely adopted and popular for at least a decade or even longer. ?

Transformative applications will also drive the emergence of new platform companies that will orchestrate and manage new ecosystems. These companies will be the next generation of Google and Facebook. This requires patience to achieve. While it's too early to start thinking about large-scale investments, developing the necessary foundations—tools and standards—is still worthwhile. ?

Conclusion

In addition to providing a reference for the popularization of blockchain, TCP/IP also laid the foundation for the development of blockchain. TCP/IP is now ubiquitous, and blockchain applications are built on digital data, communication and computing infrastructure, which reduces the cost of experimentation and allows new use cases to emerge quickly. ?

Using our framework, company executives can figure out where to start preparing their companies for future blockchain adoption. They need to ensure that company employees understand blockchain, can develop company-specific application projects in the four quadrants we built, and invest in blockchain infrastructure. ?

However, judging from the development path of TCP/IP, time, obstacles to technology adoption, technology complexity, etc., company executives should carefully consider the risks in blockchain testing projects . To put it more clearly, it is better to start small. But the scale of investment should depend on the current situation of the company and the industry situation. Financial institutions are doing well in adopting blockchain technology. Manufacturing is not ready yet. ?

No matter what, blockchain is likely to impact your business. The biggest issue is time.