Private “permissioned” blockchain networks remain the best use case of the technology for most industries in the short term, according to research released this month by management consulting firm McKinsey & Company. A report on the research urges most enterprise users to focus on potential cost savings over transformation as the technology continues to mature.
“Blockchain does not have to be a disintermediator to generate value, a fact that encourages permissioned commercial applications,” Brant Carson, a partner in McKinsey’s Sydney office, noting that the technology’s short-term benefits are “predominately in reducing cost before creating transformative business models.”
In the long run, however, the balance may shift toward public blockchains and more transformative models. Businesses that are market leaders in sectors with comparatively less regulatory oversight may be better served by moving forward now, the report states.
private blockchain models MAY hold the greatest potential in the short term.
“With the right strategic approach, companies can start extracting value in the short term,” the McKinsey research states. “Dominant players who can establish their blockchains as the market solutions should make big bets now.”
Private vs. Public
In the simplest terms, permissioned blockchains limit access or decision-making to specific individuals or entities, an idea with obvious attraction to businesses or consortia within an industry or sector. By contrast, permissionless blockchains, including bitcoin () and networks such as Ethereum, are open to anyone. Complicating matters, permissioned networks can exist on public blockchains, with only authorized users allowed to record or verify information.
Despite their restrictive nature, a number of complex governance models can be deployed within permissioned networks to aid decision-making by consortia, including assigning different roles to users and using algorithms suggested by a . Without such mechanisms, purists argue, a network is merely a distributed ledger, not a blockchain.
Private models may hold the greatest potential in the short term, McKinsey’s research suggests. “Private, permissioned blockchain allows businesses both large and small to start extracting commercial value from blockchain implementations,” according to Carson. “Dominant players can maintain their positions as central authorities or join forces with other industry players to capture and share value. Participants can get the value of securely sharing data while automating control of what is shared, with whom, and when…
“For all companies, permissioned blockchains enable distinctive value propositions to be developed in commercial confidence, with small-scale experimentation before being scaled up.”
The Cost of Disruption
Based on analysis of more than 90 discrete use cases across multiple industries, the McKinsey research suggests that more than 70 percent of the blockchain’s short-term value proposition comes from cost reductions, such as mitigating recordkeeping and improving the reconciliation of transactions. Revenue generation and capital relief round out the short-term benefits.
Carson noted the disruptive potential of permissionless public blockchains to create “true peer-to-peer models,” but stressed the technology remains “relatively immature,” governance decisions pose challenges and “the mentality shift required and the commercial disruption such a model would entail are immense.” If early experiments on private networks are successful, more disruptive ones may never emerge.
“If industry players have already adapted their operating models to extract much of the value from blockchain and, crucially, passed on these benefits to their consumers, then the aperture for radical new entrants will be small,” he wrote. “The degree to which incumbents adapt and integrate blockchain technology will be the determining factor on the scale of disintermediation in the long term.”
Use Cases Matter
Many sectors have already embraced the idea of private blockchains. A 2017 survey of retailers by Cognizant, for example, found that a plurality (43 percent) believe that private ecosystems will emerge, with the remaining participants split between a future of open (27 percent), consortia-based (13 percent) or hybrid approaches (12 percent). Even so, use cases within industries may call for different approaches.
“Private (permissioned) blockchains may prove most appropriate for accounting or supply chain management since they can be limited to selected participants, provide the ability to modify the network’s rules as needed and offer greater security,” according to a Cognizant . “Retailers may adopt a public (permissionless) blockchain to allow customers to access information, such as managing loyalty rewards or to see the provenance of their products.”
That’s a sentiment echoed by Ajit Kulkarni, vice president of product for Chronicled, which has developed private blockchains for different industries. “if you want the general population to be investors or users in your business, then a public blockchain likely makes more sense for you,” Kulkarni . “If you’re ready to create a small group that works together towards a solution, choose a permissioned blockchain. Either way, you’re leveraging the blockchain network to drive your project forward.”