Enterprise blockchain promises to digitally disrupt the business-to-business (B2B) and back office processes of virtually every industry by reshaping how organizations transact and collaborate. Industry analyst Gartner has estimated that blockchain could unlock over three trillion dollars in business value over the next decade from today’s inefficient business processes. While organizations realize benefits from blockchain immediately in the form of efficiencies and cost savings, even greater value is realized as the solution is scaled and more members join in. This is sometimes referred to as the “network effect”.
Research by McKinsey shows that an emerging set of digital ecosystems could account for more than $60 trillion in revenue by 2025, or more than 30% of global corporate revenue. We are seeing a major shift where value is being created through these business networks, known as consortiums, instead of the more traditional product-based approach.
As more and more enterprise blockchain networks go into production, we gain valuable insights about what it takes to build a successful consortium, or business network.
What is a Blockchain Consortium?
Let’s start by defining what a consortium is: an association of two or more individuals, companies, organizations or governments (or any combination of these entities) with the objective of participating in a common activity or pooling their resources for achieving a common goal. When we think of a blockchain business consortium, it often includes organizations who typically compete with one another joining forces to collaborate and transact in order to improve workflows, accountability and transparency. A business consortium can be led by one or more incumbent industry players, with the goal of developing solutions that leverage blockchain technology for the benefit of all its members.
Benefits of Business Networks
Why would competitors want to join forces and participate in a blockchain consortium? Because the strategic value of blockchain is often best realized through its adoption at scale. In Deloitte’s 2019 Global Blockchain Survey, the following benefits were cited as reasons for participating in a consortium:
- Cost savings
- Accelerated learning
- Sharing risk
- Building critical mass of adoption
Types of Consortia Models
1. Sponsor-Lead Consortiums
New entrants exploring the blockchain space often begin with a sponsor-led consortium where one organization is effectively the “owner”. In this model, the sponsoring organization incurs the cost to develop and set up the initial platform. They are responsible for determining how the business network will operate, what the costs to each member will be, the standards that will govern the network and who can join. In the sponsor-led model, members must follow the rules and guidelines set by the owner and are not involved in setting the strategic direction of the consortium.
2. Co-Owned or Co-Operated Consortiums
A more common, successful model for a consortium heading into production is a “co-owner” or “co-operator” shared approach. The members are all co-owners, sharing the costs and benefits and working as equals within the network. The rules and guidelines for how the consortium will interact and operate are agreed upon by all members in a collaborative approach.
This was the approach taken by the leading Trade Finance consortia, komgo. Komgo created a new entity, made up of 15 of the world’s largest institutions including international banks, traders and energy majors, where they all shared the costs of development and operation. Komgo took a more collaborative approach, quickly getting all of the key stakeholders bought in with agreements for how the collective group would manage and grow the business network. This was a large part of how komgo was able to get into production in under six months.
While both models have advantages and disadvantages, sometimes there can also be a “hybrid” consortium approach where key stakeholders establish a separate entity to create the consortium, and then grow the business network over time with the additional participating companies.
Challenges to Consortia Building
No matter the reason for establishing a consortium, there are many considerations on how you should structure it, and what trade-offs you should make to ensure you can scale, attract new members, maximize the value of participation and avoid some of the common pitfalls that set back consortia.
One of the biggest challenges facing blockchain adoption today is how to bring together a group of stakeholders to collectively agree on a set of standards that will define the business model. Many of these challenges can be eliminated simply by being aware of them and ensuring they are addressed and planned for properly. Others may require a more thoughtful approach and should be considered when evaluating solutions to ensure they are accounted for.
Scaling and Governance
When it comes time to scale your modern business network, you want to ensure you have the processes and requirements agreed to ahead of time. Most people don’t realize just how different doing business in the blockchain world is from other enterprise technologies. Blockchain requires a “shared IT” approach, where nobody has complete control, but everybody has some control.
It’s been said that blockchain is a “team sport”. That means you need to think about things differently. You need to move away from how things might impact your business or siloed organization and think more broadly about how things will impact that network, or the collective group. All network members should have a clear understanding of who can invite new members and what kind of participation new members are eligible for, all documented as legal agreements prior to forming the consortium. How will IP Rights, Trust and Obligations be handled? Who can onboard new members into the network? Will those new members be responsible for validating transactions? What happens when a network participant exits the consortium?
You must also take into account the diverse nature of modern business networks. Often times, the initial group forming a consortium talks about their technology stack and requirements but forget to take into account the needs of future organizations that will participate in the network. So you need to think about how these types of preferences and IT mandates will affect the onboarding of new members. Will everybody want to go with the same cloud provider? Will any new members have requirements different from yours? You need to accommodate for all of the different variants and requirements of future business network members.
This may seem like an obvious one, but it’s important to be looking at the right set of technological obstacles. Most people are aware that blockchain technology, in and of itself, is complicated. There are new programming languages, cryptography, consensus mechanisms and a ton of other really complicated stuff that needs to be mastered when building blockchain solutions. But those are the things that most people are aware of going into it. The real technology hurdle comes after setting up the initial blockchain.
The chain is only about 5% of a complete blockchain solution. Most projects have over 40 components to them, including connections to systems of record and other specialized technologies like peer-to-peer messaging with end-to-end encryption, secure document transfer and peer sharing, event streams of onchain transaction processing, enterprise key management and signing services, and REST API layer for contract and transaction management required to build decentralized applications.
Enterprise IT is hardened. There are safeguards in place to ensure updates and rollouts of system upgrades happen in a predictable and known manner. This tends to work well when you only have to consider one organization, but it is problematic when you start to think about how all of that can be handled across an entire business network. How can you ensure that your distributed solution can be enhanced, patched, fixed or upgraded across all of the IT organizations participating in the network?
Another often overlooked component to consortia planning is support. In the same way you need to think about how you will upgrade or make fixes to the technology stack across a network of IT organizations, you must also consider how all of these entities will be supported across the lifecycle of the solution. Supporting an entire ecosystem of diverse IT organizations presents unique challenges that are often overlooked. Make sure you think about some of the following questions:
- Who do you call when you need help? Who supports the business application vs. who supports core infrastructure? How well does it scale?
- How will you bill people? Is it an all-you-can-eat approach? Is it built into the consortia fees? Is there a discount? Can everybody use the same billing mechanism?
- How do you coordinate business applications? How does everybody’s infrastructure hookup to the larger network?
- Does everybody in the network get the same level of support, or does it vary based on role?
Tips for Successful Blockchain Consortia
1. Have a clear mission for the consortium.
Make sure your mission is clearly articulated and communicated. Why does this consortium exist? What are you trying to accomplish?
2. Determine the type / role of members.
Be clear on the different roles and member types within the consortium. This can often be contentious, so be sure to clearly state the specific requirements a joining member needs in order to become each type of member. There is no single “right” way to structure member roles. The roles should be determined based on the mission of the consortium. Some common member types include:
- Members of the Governance Entity –have voting power in the technical and political decisions, strategy and roadmap.
- Full Members - full privileges over the network to deploy their applications, query and store data in the ledger, participate in the consensus and validation process
- Partial Members – can deploy applications and query store any information in the ledger, but do not have validation permissions.
- Read-Only Members – only have permission to query-stored information in the ledger. This would be a typical role for regulators.
- Users – the end-users allowed by members to use their applications.
3. Identify the founding members that understand the vision and long term benefits
Find companies who know the value the consortium will bring and who will put in the effort to do things like maintain signing nodes, be sponsor users or contribute to the development directly of the Dapp.
4. Reduce the number of expensive decisions and tasks required across all participants
Minimize the number of decisions that require the entire committee, as they will always be costly and time-intensive. Consider forming smaller groups and empowering them to make committee decisions. For example, the committee could appoint an architecture board or engineering team, vet a technology partner or form a security working group. The smaller more autonomous groups can progress faster without needing to constantly check in with everyone.
5. Ensure you can deliver updates quickly and rapidly iterate on the business value of the solution
Remember that delivering updates and fixes for a business network is far more complicated than it is for a single IT organization. You need to build separation of concerns and architectural protection so that the shared components and cross-connected infrastructure can be updated for all participants. In situations where the pieces must be customized and be close to the back-end systems of the network participants, make sure they can be updated independently without having to align everybody’s schedules.
6. Plan for diverse participation
Even if your initial consortium is comprised of organizations with similar IT mandates and preferences, that will likely change as your scale the business network. Future members may not be able to run on a specific cloud – or even use a cloud vendor at all. Make sure you can provide flexibility and choice wherever possible, making it easy for participants to collaborate with the business network while staying within their own corporate mandates and guidelines.
7. Ensure governance can easily be handled in this “Shared IT” environment
Make sure you have a plan for tackling onboarding and governance across a diverse and globally distributed network where everyone has some control, but no one is in complete control. You need to have a plan for how to onboard new members and automated tools for each member to manage nodes, data and key materials. Since members of a business network are often competitors, some information will need to be shared, but some data should not be disclosed to the entire network. Make sure your solution accounts for this and includes easy to use tools that accommodate for these requirements.
No matter what type of blockchain consortium you are creating, be aware of the common challenges and make sure you account for them in your planning. The collaborative nature of blockchain presents unique challenges that must be considered for any successful deployment.