Advisory Note

Demystifying the Blockchain: What Makes a Blockchain Useful to a Firm?

Blockchain technology – as the hype advertises – can be a value-adding solution for businesses and individuals. However, it is necessary to separate blockchain’s functionality from its fame before a firm can find an appropriate use case. This report deconstructs the main features that make blockchains unique from traditional database software and identify the ways that blockchain can be used to address the preexisting issues in a database.

Anne Bailey

aba@kuppingercole.com

1 Executive Summary

Blockchain technology – as the hype advertises – can be a value-adding solution for businesses and individuals. However, it is necessary to separate blockchain’s functionality from its fame before a firm can strategically implement it. By highlighting the main features that make blockchains unique from traditional database software, it is possible to see how blockchain can be used to address the preexisting issues in a database.

A blockchain is a digital solution to create a permanent, unchangeable record of transactions. It is most known for being the underlying infrastructure for cryptocurrencies, but can also be applied to managing supply chains and facilitating asset transfers. There are several features that are unique to the blockchain architecture that make it stand apart from traditional solutions. These features are: Blockchain’s decentralized nature, its method for achieving consensus, and the immutable status of its transactions.

However, not every blockchain protocol is identical; of the blockchain protocols that have achieved moderate maturity, only a few are designed with the needs of the enterprise in mind. Blockchain protocols with the capability for pluggable or dynamic consensus, as well as a strong system for permissions unlock the most usability for enterprises. Businesses should carefully assess the risks of integrating blockchain into existing processes.

Part of those risks involved the innate connection between first-generation blockchains and cryptocurrency. Because the first blockchains required a native coin to power the validation process, it is impossible to separate activities on these blockchains from the volatile and speculative trading of cryptocurrencies. Later generations of blockchains are separating the technology from cryptocurrency use by designing permissioned access control, thus reducing associated risks. Protecting customer data in compliance with GDPR standards is another consideration that enterprises must take action on when implementing a blockchain solution. Privacy – the degree to which a node or user can be identified – is the cornerstone of these topics. Businesses should always question how privacy is designed and enforced on any blockchain solution.

With a general knowledge of how blockchains operate and an introduction to the enterprise-ready solutions that already exist, a firm can examine its own databases to identify potential cost savings or profit-generating opportunities. The four ways that a blockchain typically brings value to an enterprise is by leveraging its decentralized management, its immutable status, the sequenced order of data, and its function as a ledger. A decision tree designed by KuppingerCole can be used to guide managers through this process to assess quickly if a blockchain solution could address preexisting weaknesses in a database. A blockchain is a specialized and not yet mature tool, so managers should remain cautious when choosing to pursue a blockchain solution.

The applicability of blockchain solutions to an enterprise can be identified through a series of use patterns. Use patterns highlight common features of the blockchain that are present in multiple cases. While the list in this report is not exhaustive, it can serve as the foundation of essential blockchain functions that firms use to reduce costs or generate profit.

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