Innovation in blockchain-based business models and applications … · 2018-06-20 · Innovation in blockchain-based business models and applications in the enterprise environment

Innovation in blockchain-based business models and applications

in the enterprise environment

"Die rasante Entwicklung wird in den kommenden 10 Jahren dazu führen, dass ein signifikanter Anteil von Finanz-transaktionen mit Blockchain-Technologie bzw. DLT (Distributed Ledger Technology) unterlegt sein wird. Dieses Paper zeigt Ansätze des disruptiven Potentials für unzählige Branchen."

Prof. Dr. Philipp SandnerLeiter des Blockchain CentersFrankfurt School of Finance & Management

Innovation in blockchain-based business models and applications in the enterprise environmentProf. Dr. Philipp SandnerNicolas Dill

Frankfurt School Blockchain Center & FERI Cognitive Finance Institute

Frankfurt am Main, Juni 2017

Prof. Dr. Philipp Sandner

Leiter des Blockchain CentersFrankfurt School of Finance & Management

Dr. Heinz-Werner Rapp

Innovation in blockchain-based business models and applications in the enterprise environment

Vorwort

Liebe Leserinnen, liebe Leser,

die Blockchain-Entwicklung ist eines der spannendsten Phänomene der heutigen Zeit. Nachdem das Thema, nicht zuletzt wegen der massiven Kursschwankungen des Bitcoins, kontrovers diskutiert wurde, kehrt am Markt wieder eine gewisse Normalität ein. Ohne die Technologie würde das komplette Bitcoin-System und andere Kryptowährungen nicht funktionieren.

Die Blockchain-Technologie bietet allerdings nicht nur Kryptowährungen eine Plattform, sondern könnte in Zukunft auch den Alltag von Industrien, Banken und Versicherungen revolutionieren. Durch automatisierte Prozesse kann der Transfer von Geld, Wertpapieren oder sogar Grundstücken revolutioniert werden. Disruptive Veränderungen bisheriger Prozesse können vor allem im Bereich der Erfassung, Abwicklung, Dokumentation und Verifikation von Transaktionen und Geschäftsprozessen erfolgen.

Aber woraus besteht eine Blockchain überhaupt und wie können Prozesse damit abgewickelt werden?

Die Blockchain ist eine IT-Infrastruktur, die eine digitale Dokumentation von Vorgängen und eine digitale Verwaltung von Eigentumsverhältnissen ermöglicht. Der Ansatz basiert auf dezentral gespeicherten Transaktionsdaten, weshalb man auch von einem „dezentralen Buchführungssystem“ spricht. Es bildet sich so eine stetig wachsende dezentrale Datenbank, auf der Vorgänge und Transaktionen minutiös dokumentiert sind. Ausschlaggebend ist dabei, dass spätere Transaktionen auf früheren Transaktionen aufbauen. Aufgrund der dezentralen Struktur kann außerdem jeder Berechtigte die gesamte Transaktionsgeschichte einsehen und nachvollziehen, was die Manipulationswahrscheinlichkeit auf ein Minimum reduziert.

Auf der Grundlage der Blockchain-Technologie lassen sich neue Applikationen entwickeln und komplett neue Ökosysteme begründen. Diese Publikation soll einen kurzen Überblick darüber geben, welche Möglichkeiten die Blockchain-Technologie Unternehmen und Anwendern bieten kann und wichtige Grundlagen und Anwendungsbereiche aufzeigen.

Wir wünschen Ihnen eine spannende Lektüre und stehen für weitere Fragen und Anregungen gerne zur Verfügung.

Gründer & Leiter Steering Board FERI Cognitive Finance Institute

1 ExecutiveSummary................................................................................................................ 1

2 Introduction ........................................................................................................................... 2

3 Blockchain background - recent developments .................................................................. 4

4 The enterprise blockchain environment ................................................................................. 7

5 Innovation activity in public listed startups and enterprise applications ......................... 14

6 Conclusion ............................................................................................................................. 18

References ............................................................................................................................................... 20

Inhalt


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Blockchain ist ein Protokoll, das kryptographisch verschlüsselte, direkte und transparente Transaktionen von Werten oder den Austausch von Informationen ermöglicht. Die Summe der Transaktionen in einem Netzwerk werden in einer dezentral verteilten und unveränderlichen Transaktionshistorie abgelegt. Dies hat insbesondere im Finanzsektor und Unternehmensumfeld dazu geführt, Blockchain auch als eine Art verteiltes Hauptbuch (Distributed Ledger) zu beschreiben. Der Begriff Distributed Ledger fungiert daher heute als eine Art Sammelbegriff für die vielfältigen Ansätze in diesem Technologiefeld.

Der Großteil der entwickelten Anwendungen im Unternehmensbereich konzentriert sich heute auf die Digitalisierung von existierenden Prozessen und Geschäftsaktivitäten mit Hilfe der Distributed Ledger Technologie (DLT). Hierbei stehen vor allem Effizienzsteigerungen in der Abwicklung von Transaktionen, insbesondere im Zahlungsverkehr, durch das Umgehen von Intermediären im Vordergrund.

Eine zentrale Rolle bei der Entwicklung des Distributed Ledger - Ökosystems nehmen Konsortia ein. Diese Interessengemeinschaften, bestehend aus großen Institutionen und Unternehmen, werden die Entwicklung von Standards in der Distributed Ledger Technologie für spezifische Industrien vorantreiben.

Aufgrund der Komplexität und Bandbreite des Anwendungsspektrums der Blockchain Technologie bieten existierende Transaktionsprozesse und Geschäftsmodelle eine fundierte Basis um erste Einsatzmöglichkeiten zu erschließen und darauf basierend neue Wertschöpfungspotentiale und Anwendungsmöglichkeiten zu entwickeln.

Um jedoch das volle Potential intermediär-freier Transaktionen sowie dezentralisierter, disruptiver Geschäftsfelder auszuschöpfen, müssen Anwendungsfälle von Grund auf neu entwickelt werden.

• Today, value creation in blockchain-based applications and business activity is predominantly efficiency-driven and includes enhanced digitization of processes as well as cost efficiency due to a quicker settlement of transactions.

Current use cases are constructed around existing activities in established markets and prevalently focus on cost-related efficiency to drive value creation. However, numerous approaches to implement blockchain technology show potential to extend the scope of value creation beyond that inherent in the initial use case setup and create value by offering new business services.

As blockchain technology may be too complex for a quick mass adoption across all industries, innovative business activity in existing markets in the enterprise blockchain environment will help to promote the technology’s acceptance.

A key question that remains is whether blockchain and distributed ledger technology will be a new means for multi-faceted digitization efforts across all industries or enable truly decentralized business models which promote both the creation of new markets and concept of disintermediation.

Thus, to fully exploit the originally proposed concept of disintermediation as well as enhanced P2P-interaction, either secured through computation or selected authorities, new use cases must be created from scratch.

Public, token-based business models operated by startups shape novel forms of value creation beyond efficiency by linking existing business activities in novel ways and provide one possible opportunity to invest in the public blockchain environment.

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Wesentliche Punkte: Key facts:

1. EXECUTIVE SUMMARY


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2. INTRODUCTION

The history of intermediaries and centralized data bases goes back until the early stages of trade and

financing. Ever since registries as well as banks and notaries have been of a centralized nature (Davidson,

Filippi, & Potts, 2016b). In today’s hyper-connected world, a single security transaction for example involves

numerous intermediaries (Evans, 2016). Consequently, a technology with the potential to disrupt and

eliminate the concept of trusted intermediaries such as banks, brokers or any form of registry attracts a vast

amount of attention.

With the publication of an idea for a trustless peer-to-peer currency by Satoshi Nakamoto (2008) the concept

of blockchain became known. Based on this concept, the crypto-currency Bitcoin was created, and soon other

crypto-currencies followed. Along with these crypto-currencies, crypto-currency exchanges and other market

participants (e.g. specialized news and media entities) emerged and created an ecosystem that can be best-

described as blockchain-economy.

Blockchain is regarded as the key innovation behind crypto-currencies (Peters, Panayi, & Chapelle, 2015). It

is often examined in comparison to the rise of the internet and is said to initiate a new digital decentralized

revolution, as its distributed nature possibly replaces any intermediary (Swan, 2015; Wright and Filippi 2015).

Swan (2015) takes this yet one step further in characterizing blockchain as the “fifth disruptive computing

paradigm” (p. xi, preface)1. Enthusiasts further argue that it will disrupt industries and institutions as well as

create new markets (Crosby, Nachiappan, Pattanayak, Verma, & Kalyanaraman, 2016; Davidson, Filippi, &

Potts, 2016a). Specifically, the association of blockchain as transformative “trust machine” and its assigned

1 The other disruptive computing paradigms according to Swan (2015) are mainframes, PCs, the Internet, as well as mobile/ social networking.

blockchain: Blockchain is a protocol that enables the decentralized, secure, direct, digital transfer of values and assets and a type of distributed ledger. Distributed ledger is a comprehensive term for various forms of decentralized, shared and synchronized data and transaction histories.

crypto-currency: The term crypto-currency refers to a blockchain protocol that enables the possession and transfer of a crypto-graphically secured digital asset on a public distributed ledger.


https://www.feri-institut.de/glossar/b/block-chain/

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potential to radically affect the nature of transactions have attracted a vast amount of attention outside the

periphery of crypto-currencies (The Economist, 2015).

The novelty of the blockchain technology combined with its claim to provide a shared, decentralized form of

trust as well as enable intermediary-free transactions makes it a particularly attractive topic of research.

Parallel to the increasing number of crypto-currencies, several innovative approaches to tackle the potential

of blockchain technology were launched by enterprises, startups and organizations. Consequently, new

business models and various formats of collaboration emerged to shape the rising blockchain economy. A

popular form of collaboration are consortia which are often driven by multiple established industrial,

financial and institutional players. The R3 consortium for example, consists of some of the world’s largest

banks and aims at building a new operating infrastructure for financial markets (Brown, Carlyle, Grigg, &

Hearn, 2016). Hyperledger, an open-source collaboration to promote cross-industry blockchain solutions,

involves participants from finance, banking, supply chain, manufacturing and technology (Hyperledger,

2017). Consequently, the parties involved in various projects determine the scope of approaches which range

from energy and supply chain management, land and asset registries, the internet of things (IoT), to projects

as a far as digital governance and e-voting (Christidis & Devetsikiotis, 2016; Davidson et al., 2016b; Evans,

2016).

We identify two overarching streams that shape the blockchain-economy: the public and the enterprise-

environment. Next to the public blockchain environment, which consists of tradable crypto-currencies, e.g.

Bitcoin, Litecoin and Ripple, enterprise-driven blockchain approaches emerge. The enterprise-blockchain

environment focuses on blockchain-based business models and applications initiated by enterprises and

startups.

consortium: A consortium describes a group of companies, and/ or institutions with a shared interest to develop a distributed ledger for a specific purpose. Typically, its objective is to develop an infrastructure standard which is then utilized to enable the development business solutions within a particular industry.


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3. BLOCKCHAIN BACKGROUND - RECENT DEVELOPMENTS

Generally, a blockchain can serve different purposes. It can serve as data record, provide the infrastructure

for a crypto-currency, e.g. Bitcoin, or enable a transfer of an asset stored on the blockchain (Pilkington, 2015;

Schlatt, Schweizer, Urbach & Fridgen, 2016). Nowadays blockchain is perceived as complex multi-purpose

solution and proclaimed as impulse for a new digital revolution. A crypto-currency blockchain is a distributed,

public network on which native coins are created, transacted and circulate. Combined with an underlying

consensus mechanism and an incentive scheme, these features establish trust in the network. Similar to

monetary economic value for fiat currencies, trust also drives the value associated with a crypto-currency,

which, for Bitcoin e. g., is determined by supply and demand patterns, as well as its artificial scarcity.

Further, it supports the network’s stability as miners are incentivized to work in favor of the crypto-currency

and are less likely to undermine the consensus or launch an attack on the system due to their share in the

crypto-currency. As the proof-of-work consensus mechanism has been criticized for intentionally wasting

resources (computing power& electricity) other forms of consensus mechanisms have emerged, for example

proof-of-stake (POS) or directed acyclic graph (DAG).

As with other rising technology, technical terms and taxonomy have not been settled to date. Hence, the

term crypto-currency is often utilized to describe any form of Bitcoin or altcoin that bases on a concept linked

to a public blockchain.

Also, the terms coins and tokens for instance are often used interchangeably, however must be considered

distinctively (LeBeau, 2017). Rohr and Wright (2017) propose to differentiate between protocol tokens,

which are native to the blockchain protocol and application tokens, which refer to tokens that operate on an

external blockchain protocol. Native tokens or protocol tokens may be also referred to as coins when referred

consensus mechanism: A key element of blockchain technology is for participating nodes to collectively agree on the ledger’s transaction history. To validate a set number of transactions within a block and finalize the respective block, a mathematical puzzle must be solved, a consensus mechanism referred to as proof-of-work (POW). The first node to solve the puzzle is rewarded with a predefined amount in the respective crypto-currency – a process known as “mining”. Mining provides an incentive to all participating nodes to validate transactional activity in the network.

altcoin: The term altcoin is an abbreviation and serves as collective term for crypto-currencies that were created as an alternative to bitcoin. Currently, more than 1500 crypto-currencies are tracked on CoinMarketCap.com.


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to in the context of a crypto-currency (Rohr & Wright, 2017). To differentiate clearly among the different

types, the following for the remainder of this text can be proposed: coins by definition have a certain value

associated with them and represent a protocol token of a crypto-currency (EBA Working Group, 2015).

Tokens however, represent “multi-faceted levels of value” and facilitate multi-step interactions between two

or more parties (Christidis & Devetsikiotis, 2016; LeBeau, 2017, p. 2). Their usability exceeds the basic

monetary concept of a crypto-currency. Tokens solely utilize the concept of crypto-currency blockchains and

extend its functionality, for example by enabling a token-based value transfer (Bonneau et al., 2015). Tokens

can fulfill a variety of functions, for example represent assets, such as commodities, fiat-currencies, securities

or other financial instruments (Bonneau et al., 2015; Tapscott & Tapscott, 2016). Moreover, token-enabled

transactions are linkable to conditional procedures. These programmable blockchain transactions are also

referred to as smart contracts (Crosby et al., 2016). Christidis and Devetsikiotis (2016) define smart contracts

as a previously programmed element on a blockchain, which is carried out if addressed in a specific

transaction.

Originally, the idea of smart contracts was first introduced by Nick Szabo (1997) but was little noticed until

linked to the concept of crypto-currencies (Crosby et al., 2016). A smart contract for example can carry out

an asset transfer between two parties automatically and control an asset transaction from one owner to

another, which is recorded on a blockchain. In the scenario of a property-asset linked to a token, the

blockchain represents an executing authority and digitized notary for the change in ownership likewise. This

concept, also described as smart property, can be applied to a diverse set of other scenarios (Swan, 2015).

For smart contracts the underlying blockchain serves as trusted infrastructure, which enables a seamless

execution of transactions. In this context, the blockchain carries out a programmable sequence of tasks.

Token-based applications have already been discussed as multi-purpose solution for several business areas,

for example within in the financial sector or the insurance industry (Tapscott & Tapscott, 2016). To facilitate

and enhance the development of token-based blockchain applications, a few blockchain enterprises

developed blockchain protocols that enable third parties to build decentralized applications on their

blockchain infrastructure, such as Ethereum, Nxt or Omni (Coinmarketcap.com, 2017b).

smart contracts: Smart contracts refer to a previously programmed element on a blockchain and are carried out if addressed in a specific transaction. If, for example a pre-defined set of conditions are met, the transfer of an asset between to parties could be carried out accordingly. Originally, the idea of smart contracts was first introduced by Nick Szabo in 1997) but was little noticed until linked to the blockchain.


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In 2013, Vitalik Buterin introduced Ethereum, a blockchain platform that provides the infrastructure to build

and run decentralized blockchain applications (Swan, 2015). Ethereum provides a programmable blockchain

infrastructure to extend the functionality of the original Bitcoin blockchain (Bonneau et al., 2015; Buterin,

2013). It is designed to accommodate token-based applications and smart contracts on its infrastructure

which are carried out with ether, the underlying crypto-currency (Christidis & Devetsikiotis, 2016). Ether

hereby serves as native token, enables transactions and also settles transaction fees. More importantly,

Ethereum enables third parties to build decentralized applications on its protocol, by creating tokens with a

diverse set of functionalities on the Ethereum-blockchain. These tokens “can be assigned various economic,

voting, participation, consumptive or utilization rights” and build the foundation for decentralized

applications (Rohr & Wright, 2017, p. 12). Token-based decentralized applications built on an infrastructure

protocol such as Ethereum provide a platform for various new formats of business models.

Fascinatingly, Nakamoto (2008) in his introduction of a trustless peer to peer crypto-currency was first to

point out that an entirely decentralized system may not be a convenient solution for every blockchain

scenario, arguing that “businesses that receive frequent payments will probably still want to run their own

nodes for more independent security and quicker verification” (p. 5). The idea to limit the verifying nodes

respectively to restrict access to the blockchain initiated the differentiation of permissioned and

“unpermissioned”, public blockchains. Thus, depending on the protocol, nodes that verify transactions on a

blockchain “can be subject to authorization, as well as legal accountability” (Peters et al. 2015, p. 11). Buterin

(2015b) distinguishes between three “blockchain-like databases”, namely public, private and consortium

blockchains (p. 2). Public blockchains rely on cryptography and a consensus mechanism to validate

transactions as access is not restricted and are considered to be “fully decentralized” (Buterin, 2015b, p. 2).

A consortium blockchain is best-described by a “pre-selected set of nodes” (Buterin, 2015b, p. 2) and may

for example constitute of a group of institutions (e.g. R3 - Corda). Benefits of consortium blockchains, for

example include the partial independence of extensive proof-of-work or proof-of-stake consensus

mechanisms as fewer nodes are sufficient to verify transactions. Private blockchains are protocols that are

subject to a form of authority which do not grant access or modification rights to third parties. However, they

can authorize others with “read-only” privileges as form of transparency measure (Buterin, 2015b). Read

permissions hereby address access to a blockchain protocol without allowing someone to make changes to

the semantics, opposing to “write” permissions that grant the right to operate as “miner” or further develop

the protocol (Buterin, 2015b).

The concept of access rights which are controlled by a limited number of central actors however, contradicts

with the primary intent of blockchain to eliminate intermediaries and provide a decentralized form of

consensus enabled by cryptography. Blockchain evangelists such as Buterin, founder of Ethereum (2015b)


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argue that this form of blockchain is primarily sought after by financial institutions and intermediaries to not

lose their share in transaction-based services. Due to the fact that approaches initiated by the latter often

solely base on a permissioned form of ledger and a restricted set of nodes to ensure privacy of transactions,

computational work to achieve consensus and verifying transactions is not required. From a technical

perspective, in several scenarios the concept of linked blocks does no longer apply. These approaches can be

summarized under the subordinate term “distributed ledger technology (DLT)” (Tapscott & Tapscott, 2017).

For permissioned blockchains, trust is achieved by a form of delegated authority over the network. This can

occur in both, a public as well as private setting. Private-permissioned blockchains are subject to particular

interest of involved parties, such as consortium or stand-alone entities and for most parts do not rely on

“computational trust”, but themselves and the respective operator to guarantee the functioning and validity

of information and data linked to the ledger. Hence, trust in this setup derives from determining parties –

the periphery of the ledger.

4. THE ENTERPRISE BLOCKCHAIN ENVIRONMENT

Blockchain technology has put established businesses, such as banks and insurance in turmoil, as it

potentially threatens any form of intermediary-focused business model. This has led to increased efforts to

develop blockchain-based applications and business models in the enterprise environment. The threat of

disintermediation initiated individual as well as a variety of collaborative efforts. Large enterprises, banks

and insurance brokers have joined forces and founded consortia to represent their interests. Consortia often

aim at developing a technological framework capable of providing a distributed ledger infrastructure for a

range of application scenarios. Currently, more than 40 consortia and cooperative projects are under

development (Gratzke, Schatsky, & Piscini, 2017), some of which focus on a specific industry whereas others

direct their attention to developing cross-industry standards. R3, a consortium dominated by financial

institutions, aims at developing a financial market-focused operating system, based on a distributed ledger

technology named Corda (R3 - Consortium, 2017). The Blockchain Insurance Initiative - B3i - a consortium of

large insurance and reinsurance companies for example works on standardized distributed ledger technology

to reduce administrative efforts and enhance risk management (Gratzke et al., 2017). Other consortia, such

as Hyperledger, a collaborative organization driven by the Linux Foundation and large corporations, e.g. IBM,

Intel and Daimler look at providing a cross-industry infrastructure platform to build blockchain-based

business solutions on (Gratzke et al., 2017). Consortium efforts also derive from the public blockchain

environment, as the Ethereum foundation launched the Ethereum enterprise alliance to cooperate with

Fortune 500 enterprises as well as startups and organizations. Several enterprise-driven consortia work on


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an open-source infrastructure, however focus the operability of their platform on private-permissioned

applications. The provided infrastructure is then utilized by enterprises, such as banks, startups and other

entities to build business models, services and internal solutions with a particular focus on privacy and

regulatory compliant technological features (see figure 1).

Figure 1: Overview Ethereum, Hyperledger Fabric and R3 – Corda

Source: Own illustration

Blockchain-based business models and application scenarios

The following insights rest on cases based within the banking industry, supply chain (provenance and tracking

of assets) and a unique blockchain application within the payment processing of foreign aid in a United

Nations operated refugee camp. All application areas show a different scope and base their solution on

different platform infrastructures.

Banking: Use-Cases

The use of distributed ledger technology within the banking sector shows a diverse range of application

scenarios, from the storage of information and its validation within know-your-customer (KYC) processes to

securities settlement:


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Figure 2: Use-Cases in Banking

Source: Upchain, Blockchain Research Lab (2017)

For a commercial paper trade with two other parties involved, a large German bank, a national development

bank and an asset manager joined forces. The project was implemented on Corda as distributed ledger and

involved the trade of a euro commercial paper, a security, which was sold on the secondary market. In this

private-permissioned construct, each party was assigned a node. The use of distributed ledger technology

enables time savings as a consequence of quicker settlement. Thus, it reduces capital cost due to enhanced

capital efficiency. Moreover, transparency provided by the ledger allows to eliminate the clearing party

within the transaction process. The application enhances transparency and thus also simplifies the

administration of assets, while reducing paper-based documentation. Similar benefits can be attested for

other transaction types: A blockchain-based bonded loan transaction for example allows for several digitized

elements of the process chain. Thus, reducing manual labor as well as eliminating paper-based

documentation to reduce administrative cost and achieve substantial time savings the settlement. Moreover,

investors potentially benefit from a reduction of administrative cost, as this would allow the providing bank

to offer lower-priced transactions as well as smaller tranches due to reduced service fees. However, a fully

transparent transaction process for certain financial trades is not solely beneficial, as it may also impede

price-building mechanisms and interfere with supply and demand patterns.


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Payment processing: Foreign aid - United Nations Refugee Camp

Further, we identified a blockchain-based application in the foreign aid logistics section of the World Food

Programme within a Syrian refugee camp in Jordania. To enhance administrative efficiency within the

delivery of financial aid to refugees, a proof of authority-based, private-permissioned Ethereum network was

launched. The financial aid delivered is virtually allocated to each refugee and represented by a book money

account on the Ethereum blockchain. Each foreign aid recipient is granted access to his personal book money

account on the Ethereum blockchain and allowed to spend his funds on basic commodities in the cooperating

supermarkets. The refugees, the supermarket as well as the organization act as node on the Ethereum

network. This network operates a bank account for every recipient and is linked to local stores. The aid

recipients shop groceries as usual, however the payment is linked to an account with book money on the

network, and the transaction is confirmed via iris scan. The supermarkets aggregate the accumulated

purchases and receive a monthly payment from the organization – the World Food Program. This process

reduces the payment-related transaction fees and thus saves a substantial amount of the largest cost factor.

The savings related to transaction fees are estimated at 98% of total transaction cost and an absolute amount

of approximately USD 3.5 million per anno compared to the accumulated payment processing fees for

individual third-party payment provision. The blockchain-based bundled and more efficient transaction

process within this scenario allows to bypass the majority of payment processing resulting in substantial

annual savings in transaction fees for the World Food Program. Moreover, the established infrastructure is

extendable to further means of value creation. A second substantial cost factor within this process is the cost

of auditing. As donating parties, for example countries, demand transparency, the organization is indentured

to ensure a rightful conduction of foreign aid distribution. Consequently, next to the efficiency of payments

on-site, a transparent distributed ledger could potentially reduce the cost of auditing in this context by

enabling remote, blockchain-based monitoring structures and provide a feasible means for additional value

creation. On this basis further scenarios such as directly transmitted foreign aid from one individual to the

other are not only imaginable but feasible.

Supply-Chain: Provenance of Diamonds – the case of Everledger

Strong blockchain-based use cases with regard to supply chain-focused solutions often involve the

provenance of products. Everledger, a startup focusing on tamper-proof registry and transaction of

diamonds, generates a “digital fingerprint” of a valuable physical object and links it to a blockchain in order

to provide an infrastructure to verify its provenance, ownership and to store its characteristics. The first use-

case revolves around the diamond market with an infrastructure that bases on Hyperledger supported by

IBM, utilizing a hybrid technical infrastructure which runs on both a privat and a public blockchain. The


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certification of diamonds and their characteristics are linked to Everledger’s blockchain, which enables

numerous market participants, such as suppliers as well as intermediaries to monitor transactions of

registered diamonds and each diamond’s provenance. The reduction of fraud as well as risk for insurers in

banks create value for both, transacting parties as well as involved intermediaries such as insurers.

Everledger’s business model contributes to the aggregation of distributed data as well as document security.

Moreover, the existing, extensive multi-party paper-based documentation and verification processes, like

the Kimberley process2, is integrated into the distributed ledger application.

These use-cases in banking, foreign aid and provenance of valuable objects shows that value creation in

blockchain-based business models concerns both, efficiency-focused applications that center around cost

reduction as well as digitization of paper-based administrative processes and also transparency-driven

approaches focusing on aspects of disintermediation, particularly within clearing and settlement processes

of transactions and payments. These applications base on existing infrastructures and likewise other

emerging solutions in the enterprise blockchain particularly focus their efforts on distributed ledger

infrastructures provided by consortia tailored to their specific needs, such as Hyperledger fabric or R3 - Corda.

Generally, private-permissioned blockchains are predominantly perceived to be more efficient and also an

inevitable infrastructure choice, due to regulatory requirements, data protection and privacy issues as well

as know-your-customer-processes (KYC) for banks and other large enterprises. Regulatory components play

an important role in this context for specific innovative business activities, especially for banks and often

determines the technical setup of the application. KYC-processes are important to be embedded and involve

protection of customer data, hence solely allowing for a private-permissioned distributed ledger.

Furthermore, physical, paper-based documentation is still required for specific use cases, such as a

commercial paper issuance or bonded loan transactions or the certification valuable physical object, for

example the provenance for diamonds. Also, it is noteworthy that smart contracts are not yet considered

legally binding, which impedes fully automated processes as well as further innovation activity.

However, it is vital to point out that the majority of enterprises utilizes a private-permissioned distributed

ledger infrastructure to replace an already existing transaction process. For most use and test cases in the

enterprise environment the transacting parties involved remain the same and have interacted in a similar

way prior to constructing a DLT-focused transaction setup. When juxtaposing the original concept for a

2 The Kimberley Process describes a global regulatory scheme to reduce the circulation of conflict diamonds, which among other requirements includes certified shipments (Grant & Taylor, 2004).


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trustless peer-to-peer cryptocurrency introduced by Satoshi Nakamoto based the concepts of crypto-graphy

and decentralized consensus, substantial differences become apparent.

The ledger itself in this context serves as a foundation of trust within the group of transacting parties in this

context, however the enterprises involved assure the functioning of the system and contribute a substantial

form of trust, derived from the reputation as well as experience from the former transaction setup. A private-

permissioned blockchain or distributed ledger application combines both a transparent ledger to operate a

transaction on with trust derived from the transaction setup’s periphery. With respect to the latter, a second

theme evolves for startups: For trading a high value item, e.g. diamonds, it is favorable to have a functional

technical infrastructure as well as reliable business partners in place, as they provide trust beyond the

technology to conduct business in a long-established industry and assert the scalability, adaptability and

security of the ledger.

Innovation activity based on distributed ledger technology in the enterprise environment dominantly

revolves around applications in a pre-determined group of stakeholders. Enterprises to a certain extent

introduce blockchain as means to efficiently digitize existing transaction setups. As touched upon in the

section above, the enterprises involved guarantee the validity and operational functioning of an

infrastructure or application. Thus, trust also derives from their reputation and capabilities. It delineates from

the periphery, not the underlying technology. Nonetheless, the decentralized ledger enables enhanced

transparency and allows the partial dismissal of intermediary related inefficiencies.

Contrary to the widespread opinion, only a small share of currently more than 1,500 publicly listed crypto-

currencies (coinmarketcap.com) operate as a form payment instruments or cryptographic asset, such as

Bitcoin, Monero or Litecoin. Several listed entities are startups - small enterprises - which utilize third party

blockchains, e.g. Ethereum to develop their business model on. These entities operate on an existing

infrastructure to create a new means of value delivery to a third party, be it for either businesses or

individuals and are not only operated by publicly identifiable founders and team members but are also based

on rightfully registered company structures. As presented in figure 1, the Ethereum blockchain provides a

technical infrastructure for both, private-permissioned and publicly listed crypto-currencies. Conservatively

estimated, more than two thirds of publicly listed platform-based applications currently base their

application on the Ethereum infrastructure. Public crypto-currencies must be differentiated more precisely

and to some extent can be considered as part of the enterprise environment. These hybrid, public startups,

which by inception introduce a business model based on a publicly listed tradable token and utilize an existing

public infrastructure, operate as functioning registered companies and thus must be included within a

broader category of enterprise environment.


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Excursus: Innovation in Public Crypto-Currencies - Hybrid Startups

Innovative, publicly listed blockchain-based business models and applications are often built on existing

infrastructures, for example Ethereum. Ethereum provides a programmable infrastructure to enable token-

and smart contract-based blockchain applications. Its prevalent innovative activity centers on the

improvement of its infrastructure for third parties to enable innovative blockchain-based applications, such

as the basic attention token (BAT) or Golem. The BAT is operated by Brave Software Inc., a San Francisco

based company, and focuses its value creation on commercial digital advertising. It is best described as a

digital advertising platform which operates a number of smart contracts to enhance transparency as well as

efficiency in the digital advertising market by facilitating exchange of payment between publishers and

advertisers and by allowing to track each user’s activity. In combination with a customized browser, the BAT

offers a token-based decentralized advertising market place that links tokens to user attention and connects

these with publishers and advertisers for direct payment interaction. The BAT aims to eliminate large

intermediaries, gatekeepers such as Google or Facebook, to reduce fraud and inefficiency, while at the same

time enhancing the user’s privacy and security.

Golem, a startup operating from Warsaw, Poland, also bases its token-based infrastructure on the Ethereum

blockchain. It operates a P2P-sharing and rent business model for unused computing power and can include

personal computers as well as datacenters. It aims at providing a decentralized blockchain infrastructure that

connects unutilized computation power to allow its users to carry out distributed computational tasks. A first

use case is presented with decentralized rendering of images. The purchaser of a service can reimburse the

remote provider of computational power directly via token-based payment setup and according to Golem

benefits from a less expensive as well as a faster rendering process.


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5. INNOVATION ACTIVITY IN PUBLICLY LISTED STARTUPS AND

ENTERPRISE APPLICATIONS

Similar to consortium-based approaches, publicly listed startups operate on an existing infrastructure, such

as Ethereum but often in a strictly private-permissioned setup and consequently can be regarded as part of

the enterprise environment. Next to crypto-currencies focused on payments, innovation activity in the

blockchain economy is strongly driven by efforts which originate from enterprises and startups based on

private-permissioned blockchains.

To assess what forms of business model-related innovation activity emerges in the blockchain ecosystem,

the following framework which rests on specific aspects of innovation and business model research can

provide guidance. A set of different criteria determines the positioning of the analyzed entities within the

matrix according to two axes. On the basis of McDermott and O'Connor’s (2002) approach to illustrate radical

and incremental innovations as well as research from Amit and Zott (2012), the previously described

blockchain-based business models and applications are assessed according to two dimensions in the

following section, namely market uncertainty (MU) and novelty of value creation (VC).

Market uncertainty (MU) reflects the setting in which the business model is established and what type of

distributed ledger infrastructure it is based on.

MU-A1: Technology applied to a new market setup or industry (1)

MU-A2: Technology applied to an established market or industry (0)

MU-B1: Own public or public, decentralized infrastructure (1)

MU-B2: Private-permissioned centralized infrastructure (0)

The second axis specifies the novelty of value creation (VC). The different dimensions derive of Amit and

Zott’s research (2012) who defined various value drivers for existing enterprises to examine the dimension

of value creation.

VC-A1: By creating novel activities (1)

VC-A1: By linking existing activities in a novel way (0)

VC-B1: Value generation beyond efficiency (1)

VC-B2: Efficiency as prevalent value driver (0)


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The developed methodology does not claim to be fully exhaustive but aims to provide a more structural level

of understanding. Moreover, it allows an assessment of innovation activity related to both, the publicly listed

applications as well as enterprise-driven efforts. Figure 2 shows the graphical illustration for the analyzed

business models and applications according to the suggested dimensions:

Figure 3: Innovation activity in the blockchain environment

Source: Own illustration

At the current level of development, value creation in enterprise-based applications dominantly revolves

around efficiency. A large share of financial enterprises focuses on the deployment of a private-permissioned

distributed ledger in a trusted setting. Consequently, business model innovation activity within this industry

can be characterized as sustaining, as the perception of value delivered resembles the initial transaction

setup. Value creation in this context is primarily efficiency-driven and includes enhanced digitization of

processes as well as cost efficiency due to a quicker settlement of transactions. Furthermore, DLT increases

transparency for the administration of assets and enables the potential elimination of paper-based

documents. However, it is important to point out that cost efficiency for certain processes such as

commercial paper issuance can be achieved due to omitting the clearing and settlement agency within the

euro commercial paper transaction and by replacing it with a verification service on a distributed ledger.

Thus, it reflects Nakamoto’s proposition to enable an intermediary-free transaction to some extent while

sustaining the euro commercial paper transaction in its original pattern.


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Nonetheless, it is critical to point out that a DLT-based transaction for financial enterprises also reflects

potential to create value by offering new, additional business services. It can be argued that a transparent

instant transaction settlement allows e. g. a bank to offer participation in a bonded loan transaction in smaller

tranches due to the reduced amount of administrative cost. One must also bear in mind that financial

enterprises are subject to strict regulatory requirements, for example KYC processes.

The organization United Nations Refugee Camp application operates on a private-permissioned

infrastructure (Ethereum), which is deployed in an existing transaction setting. The underlying re-

organization of the financial foreign delivery process, substantial cost-efficiency reflects the main benefit in

the first project phase. However, for the second phase of the project the scope of value creation is enlarged

as the underlying network is extended to provide donating nations with nodes to enable remote auditing and

thus decrease the second largest cost component. This also creates an opportunity for novel value creation

in the long run as the organization intends to eventually open the architecture and facilitate intermediary

free P2P transfer and allocation of financial foreign aid.

Everledger can be characterized in a similar way. The extent at which it addresses the components of market

uncertainty is limited as it relies on strong partnerships and focuses on the use of a new technology in an

existing market. Tracking and certification of diamonds existed prior to the introduction of blockchain-based

tracking in the diamond industry, for example as introduced in form of the Kimberley process. The blockchain

technology in this context contributes to digitize paper-based issuance of certificates, aggregate distributed

data and reduce document tampering and hence enables are more efficient process allowing to monitor real-

time data with global access. The linking of a valuable physical object with a digital thumbprint to a

transparent, distributed ledger enables the monitoring of transactions in an open-market place and thus

fosters novel ways of value creation. An immutable data record of valuable assets can limit fraud across the

industry and reduce risks for banks as well as insurers.

As the juxtaposition of these enterprise business models and applications indicate, first use cases are

constructed around existing activities in established markets and prevalently focus on cost-related efficiency

to drive value creation. Nevertheless, all approaches also unveil particular potential to extend the scope of

value creation beyond that inherent in the initial value creation setting. Thus, the following propositions can

be suggested:

Proposition I: Current blockchain technology use cases in the enterprise environment revolve around

efficiency in established setups but provide a foundation to form novel value creation opportunities

beyond cost efficiency in the long run.


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Proposition II: Token-based business models can form novel forms of value creation beyond

efficiency by linking existing business activities in novel ways and, if placed in the right context,

establish new markets.

The observed business models and applications demonstrate that the utilization of the blockchain technology

to create new markets and thus to form radical means of value creation while trusting on a decentralized

consensus in the original sense established by computation and cryptography is currently limited. This is

partly attributable to the emergent nature of the blockchain economy, a natural distrust by the existing

markets and enterprises in the public, decentralized blockchain environment and a lack of a commonly

acknowledged infrastructure standard.

A question to raise, is whether efficiency-driven applications and business models, such as cost-reduction by

fostering disintermediation or digitization of processes and supply chains is substantially innovative from a

business model perspective. By now doubt, at this stage the technology enables digitally-based optimization

on several levels, however one must clearly differentiate that first use cases, particularly in the enterprise

environment, revolve around the transfer of existing processes and transaction patterns to a new platform

technology. To fully exploit the concept of disintermediation, either secured through computation or

selected public private authorities as well as enhanced P2P-interaction, new use cases must be created from

scratch. In the end, the central question that remains, is whether the blockchain and distributed ledger

technology will be a new means for multi-faceted digitization efforts across all industries or will it enable new

decentralized ways of collaboration and promote the creation of new markets. More importantly, this heavily

depends on whether the driving forces behind the technological development will be community or

enterprise-based, open-source or strictly permissioned.

“The global resource of the blockchain should not be only governed by nation states, state-based institutions

or corporations, but by a coordinated global approach” Tapscott and Tapscott (2017), World Economic

Forum, White Paper.


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6. CONCLUSION

Large businesses and institutions have been transacting and shaping international trade and commerce for a

long period of time, thus are not likely to disappear within the next years, prevalently for political and

regulatory reasons. Nonetheless, intermediaries will eventually need to adjust their business model,

particularly in the banking and financial services industry. Innovation activity is happening within large

companies and startups. In the enterprise environment, blockchain technology revolves around efficiency

(processes, automation) and new business models (integration, micro payments, developing countries).

Organizations should learn how to understand, apply and implement this technology and open up for cross-

sectoral collaboration as disintermediation is a prerequisite for a successful integration of blockchain-based

value creation.

Enterprise-driven approaches, such as consortium DLTs, built on the same principles will take a larger share

of innovation activity. Nonetheless, as more substantial applications will continue to break through,

the overall acceptance of blockchain-based business models will rise and consequently foster innovation

activity across all industries. Blockchain technology might be too complex for a quick mass adoption,

however innovative B2B or B2C business models in existing markets in the enterprise blockchain

environment will help to promote the technology’s overall acceptance. In the public blockchain

environment, token-based business models operated by startups will shape novel forms of value creation

beyond efficiency by linking existing business activities in novel ways and can serve as a potential stimulus

and attractive partner to collaborate with for financial institutions and enterprises.

Implications for Investors

Given the rapidly evolving blockchain environment, volatility in crypto-currency prices and

alternating regulatory frameworks the following section does neither constitute a recommendation nor

generally valid implications for investments in the blockchain economy. This section solely provides

an informative assessment of recent developments in the public blockchain environment.

The price surge in Bitcoin and Altcoins in the second half of 2017 lead to a crypto-hype and raised

awareness for both the publicly listed crypto-currencies and blockchain technology as a whole. As a

consequence, the crypto-currency ecosystem has matured, and an ecosystem of collaboration efforts

and service providers emerged. New business infrastructures to foster cooperation and facilitate

investing into the crypto-economy were formed. Next to consortiums, Crypto- and index funds,

specialized research companies as well as investment analysts and brokers were established.


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An investment format that has been discussed frequently are so-called Initial Coin Offerings. Initial

coin offerings (ICOs) are best described as “sale of tokens or coins” to the public for fiat currency. The

concept derives from a combination of crowdfunding and initial public offering (IPO). In an ICO, a token

is issued, which can be acquired by investors and individuals. For the most part, the token is sold prior to

the launch of operations by a startup/ founding team. Similar to a venture capital investment, the capital

raised can fund the venture’s founding or further progress, as well as cover developing cost and other

expenses. Apart from a few exceptions, most tokens operate on a third-party protocol, such as Ethereum.

Recent fraudulent behavior, as it occurred in certain ICOs, impeded a more rapid acceptance of ICOs as

investment type. Despite a missing clear regulatory body, ICO’s may be soon regarded as one of the key

advancements in the blockchain ecosystem, as they provide access to a new form of decentralized venture-

funding. ICO’s allow a larger circle of investors as well as individuals to invest in blockchain startups without

an intermediary and thus enable an active participation in private markets.


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