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1. How has blockchain been successfully applied in industry and government? 2. What barriers exist in the adoption of blockchain technology.  Introduction, Question 1, Question 2, Conclusion, References. 500 words How blockchain technologies impact your business model Vida J. Morkunas a,*, Jeannette Paschen b, Edward Boon c Abstract Much of the attention surrounding blockchain today is focused on finan- cial services, with very little discussion about nonfinancial services firms and how blockchain technology may affect organizations, their business models, and how they create and deliver value. In addition, some confusion remains between the block- chain (with definite article) and blockchain (no article), distributed ledger technolo- gies, and their applications. Our article offers a primer on blockchain technology aimed at general managers and executives. The key contributions of this article lie in providing an explanation of blockchain, including how a blockchain transaction works and a clarification of terms, and outlining different types of blockchain technologies. We also discuss how different types of blockchain impact business models. Building on the well-established business model framework by Osterwalder and Pigneur, we outline the effect that blockchain technologies can have on each element of the business model, along with illustrations from firms developing blockchain technology. # 2019 Kelley School of Business, Indiana University. Published by Elsevier Inc. AllKEYWORDS Blockchain; Private blockchain; Public blockchain; Business model; Blockchain technology; Innovation strategy rights reserved. 1. Blockchain beyond bitcoin Emerging technologies regularly serve as enabling forces for economic, social, and business transformation (Cohen & Amorós, 2014; Paschen, Kietzmann, & Kietzmann, in press). According to the Gartner Hype Cycle for Emerging Technologies, a tool to illustrate the maturity and adoption of specific technologies, blockchain placed among the top five technology trends in 2018 (Kietzmann, 2019; Panetta, 2018). Much of the attention on blockchain today has focused on its ability to change the financial services industry fundamentally. But the impact of blockchain technology goes beyond the financial sector (Hughes, Park, Archer-Brown, & Kietzmann, 2019) and encompasses any business that acts as or relies on an intermediary between two parties–—for example, a buyer and a seller–—and extracts economic rents from a brokerage position in the value chain. Therefore, blockchain is pre- dicted to challenge existing business models and offer opportunities for new value creation. Unfortunately for businesses, there is little guid- ance on the different blockchain technologies and solutions in existence today and how these might affect businesses and business models. While the blockchain technology underpinning Bitcoin is the most discussed variant, it is far from the only one. While it is easy to find sources that support block- chain’s potential to disrupt all business activity as profoundly as the internet, email, social media, or mobile did (Swan, 2015; Tapscott & Tapscott, 2016), it is much harder to find material that explains how blockchain technologies vary and how the different types can offer value to businesses. Furthermore, there exists confusion over related terms, such as the blockchain (with definite article) and block- chain (no article), both distributed ledger technol- ogies, and applications of these by which economic actors exchange digital representations of assets. Our article addresses these gaps. 2. Foundations of blockchain technology The beginnings of blockchain go back to a white paper written by Satoshi Nakamoto (2008). Nakamo- to introduced a peer-to-peer version of electronic cash, bitcoin, that allows online payments to be sent directly between parties without going through centralized financial intermediaries. As part of the implementation of bitcoin, Nakamoto also devised the ledger, which Nakamoto named “a chain of blocks” (Nakamoto, 2008, p. 7). This chain of blocks supports the new version of electronic cash (The Economist, 2015) and was later termed block- chain. Many other blockchain technologies have been developed since Nakamoto first introduced the blockchain. Blockchain provides a decentralized digital da- tabase of transactions, also known as a distributed ledger, which is maintained and updated by a net- work of computers that verify a transaction before it is approved and added to the ledger. It allows transacting parties to exchange ownership of digi- tally represented assets in a real-time and immuta- ble peer-to-peer system without the use of intermediaries. Figure 1 illustrates the six steps of asset exchange between two economic actors using blockchain technology. When a transaction between two parties is about to take place (Step 1), it is first converted into a hashed transaction proposal and stored as a candi- date to be printed on the ledger. This proposed transaction includes basic information such as date/time, sender, receiver, asset type, and quan- tity. The proposed transaction is provided with a unique cryptographic signature that ensures the integrity and authenticity of the record (Step 2) and then broadcast to a network of distributed computers for processing and authentication (Step 3). These computers process and authenticate the transaction (Step 4) and, once authenticated, the transaction is added to the digital ledger (Step 5), which completes the asset transfer between the two parties (Step 6). Each new transaction is linked to those recorded previously, providing a complete, irreversible, and verifiable history of all transac- tions ever made on this blockchain. Before proceeding further, it is important to clarify noteworthy blockchain-related terminology. Consistent with the approach suggested by Swan (2015) and Evans-Greenwood, Harper, Hillard, and Williams (2016), we herein use the terms as follow: Blockchain, without the use of an article. Block- chain technology, or a blockchain (indefinite● Figure 1. The six steps of asset exchange using blockchain Source: Adapted from Coinmama (2018). article), refers to the underlying technology: A network of computers and algorithms that pro- cess Bitcoin and many other distributed ledger applications. The blockchain, using a definite article, refers to the technology underpinning bitcoin specifically.● At its core, a blockchain is a decentralized store of information (Swan, 2015) comparable to an infor- mation systems database that is updated in real time and distributed to its user base for validated record keeping. As outlined above, validators re- view and authenticate each proposed transaction before it is added to the ledger. With regard to the type of access for the users of a blockchain, there exist two types of blockchains: public and private. Private can take on one of two subforms. Public or open blockchain technologies allow anyone to interact with another transacting party. The identity between the two parties is either pseudonymous or even entirely anonymous (i.e., the transacting parties do not know each other prior to the transaction; Vaughn, 2015). An open block- chain implies little to no privacy for transactions, implying that all participants can view all trans- actions. An open blockchain also requires a substan- tial amount of computational power that is necessary to maintain a distributed ledger on a large scale (Jayachandran, 2017). More specifically, to achieve consensus in most public blockchains, each node in a network must solve a complex, resource-intensive cryptographic problem called a proof of work to ensure all nodes of the blockchain are in sync. Examples of open blockchain include Bitcoin, Litecoin (a cryptocurrency designed to be faster than Bitcoin), and Ethereum, which is proc- essed in a different manner than Bitcoin and Lite- coin and is used primarily for smart contracts. A smart contract consists of self-executing code on a blockchain that automatically implements the terms of an agreement between parties. Private or closed blockchain technologies allow only prevalidated individuals or groups of individu- als to access the ledger and enter and view data. Here, others know the identities of all users prior to transacting. A variant of the private blockchain is the federated or consortium model, in which the blockchain operates under the leadership of a group. This type of blockchain is a private network that maintains a shared record of transactions ac- cessible only to those who have been prevalidated. Who grants new entrants permission to use the blockchain varies: Existing participants can decide on future entrants, a regulatory authority can grant new users licenses to participate, or a consortium can make participation decisions. In contrast to a public blockchain, a private blockchain offers more transaction privacy, which is critical for transac- tions involving sensitive data (e.g., the transmission of medical or financial data). The right to read the private blockchain may be open in some cases or this right is restricted to the participants only. Closed blockchains are easier to scale up, cut down costs, and feature greater transactional through- put. Additional advantages include added security, lower costs, added reliability, and a higher level of trust, as only preverified parties are able to initiate a new node in the blockchain (Coburn, 2018). Some members of the blockchain developer community do not consider private blockchains to be block- chains; heated discussions continue in web commu- nities as well as during conferences (Kessels, 2018). Examples of closed blockchains include Linux-based Hyperledger, which supports the collaborative development of blockchains and tools in banking, finance, Internet of Things, supply chain, manufacturing, and technology, and R3, a distrib- uted ledger technology company that leads a con- sortium of more than 200 firms and develops applications for finance and commerce on its block- chain platform (Vaughn, 2015). Despite the differences described above, open and closed blockchains offer some common fea- tures: Both are decentralized peer-to-peer networks, in which each participant maintains a replica of a shared append-only ledger of digitally signed transactions;● Both maintain the replicas in sync through a protocol referred to as consensus; and● Both provide certain guarantees on the immuta- bility of the ledger, even when some participants may be faulty or malicious (Coburn, 2018).● 3. How can blockchain impact your business model? Blockchain technologies offer many possibilities to grow entirely new businesses and pose direct threats of disruption to traditional incumbents. Organizations using conventional business models built on the predication of acting as an intermediary between two transaction parties must ask them- selves if and how blockchain technologies may im- pact their value propositions, how they compete, and how they operate. Pilot projects are currently underway in several industries including the use of blockchain to track the transport of goods inside of an industrial supply chain; use of smart contracts to enable secure, faster, and less expensive real estate transactions; and use of blockchain to enable con- sumers to send funds abroad without incurring de- lays or high exchange fees. Firms need to consider how their business model may be affected by rap- idly growing blockchain applications. To allow for a structured discussion of the potential impacts that blockchain can have on business models, we use the business model framework illustrated by Osterwalder and Pigneur (2013, p. 14), who said a business model “describes the rationale of how an organization creates, delivers, and captures value” and consists of nine building blocks. These nine blocks cover the four main areas of a business: its customers, the offer, the infrastructure, and finan- cial viability. The nine elements are (1) customer segments, (2) value proposition, (3) channels, (4) customer relationships, (5) revenue streams, (6) key resources, (7) key activities, (8) key partner- ships, and (9) cost structure. When taken together and properly aligned, these elements create and deliver value. Osterwalder and Pigneur (2013) sum- marized the nine essential parts of a business model in a visual template termed the Business Model Canvas. The canvas is usually drawn on a large piece of paper with sections for each of the model’s elements and thus serves as a tool to define, change, or evaluate a firm’s business model. In the following subsections, we provide a blue- print of how each of the nine essential elements could be affected by blockchain technologies and illustrate our propositions with examples that we collected from blockchain development startups in Europe, North America, and South Africa. We gath- ered public information from the startup firms’ websites, as well as news articles, press releases, and other sources. 3.1. Customer segments Osterwalder and Pigneur (2013, p. 20) defined cus- tomer segments as “the different groups of people or organizations that an enterprise aims to reach and serve.” An organization using blockchain can address existing customer segments in a market. Individuals wanting to buy or sell real estate in Sweden can use a blockchain technology pilot proj- ect powered by ChromaWay to purchase or sell homes. Customer markets served by blockchain systems can be similar to the segments served by typical organizations: niche markets, diversified markets, and mass markets. However, blockchain is distinctive in that it can facilitate access to a target market that was previously not reachable (Larios-Hernandez, 2017) and therefore creates new customer segments for a business. These are the customer segments targeted by Everest in Africa, Asia, and South America. Everest, a firm that uses a private and permissioned Ethereum-based protocol, provides a decentralized distributed ledger technology that incorporates a payment solution, a multicurrency wallet, and a biometric identity system to facilitate microfinance transac- tions, land claims, and medical records to customer segments in developing countries. The potential target market is the group of 2 billion people who have limited or no access to financial services. 3.2. Value proposition The value proposition building block includes all of the firm’s activities that create value for customers (Osterwalder & Pigneur, 2013). As Harvard Business School Professor Theodore Levitt (1974, p. 8) fa- mously said: “People don’t want to buy a quarter- inch drill, they want a quarter-inch hole.” In other words, customers do not purchase products; they buy a solution to get an important job done. The value derived by the customer will increase in direct proportion to the importance that the customer places on the job to be done and by the level of satisfaction with the current options to complete this job, the availability of other options, and their cost (Johnson, Christensen, & Kagermann, 2008). Blockchain technology can influence customer value by providing access to products or services that were previously not available or could only be garnered by expensing a large amount of time or money. Swedish company Safello uses an open blockchain protocol to provide a transparent means to exchange bitcoin against fiat currencies. By doing so, it provides resources (e.g., foreign currency) that would have been otherwise not available or only available at additional expense. Centbee, in South Africa, enables the users of its mobile app to send bitcoin to users’ contact lists. Centbee users can move money simply and cheaply across borders to support family and friends without incurring exorbitant currency exchange fees. Safello and Centbee disintermediate by re- ducing the requirement for a centralized bank, or even eliminating a currency exchange service for transactions. Moreover, blockchain technology can also pro- vide faster or less expensive transactions than those completed in traditional settings. As an illustration, the customer value proposition of certified notaries for homebuyers is based on facilitating the owner- ship transfer of the asset from seller to buyer by authenticating the documentation of the respective contracts. Working with a notary for home pur- chases or sales requires time and is often expensive. Here, blockchain technologies can reduce the trans- action cost and time for the respective parties. This may be achieved by using smart contracts. As an example, ChromaWay’s private blockchain protocol will enable Swedish citizens to use smart contracts to purchase or sell a house and reduce time and costs during the transaction. 3.3. Channels The channels building block “describes how a company communicates with and reaches its customer segments to deliver a value proposition” (Osterwalder & Pigneur, 2013, p. 26). These channels may be the company’s own sales force, website, or stores, or the channels may be the stores of its partners or wholesalers. One impact of using block- chain is the simplification of doing business. Middle parties may become disintermediated. In the previ- ous section, we mentioned an example of real estate transactions that are facilitated by smart contracts. Thisisaccomplishedby removing therequirement for time and personnel required to complete a validity check or a transaction. New types of channels may also be introduced within an organization (e.g., by sharing common code to strengthen a supply chain; Montecchi, Plangger, & Etter, 2019). 3.4. Customer relationships The customer relationship building block “describes the types of relationships that a company establishes with specific customer segments” (Osterwalder & Pigneur, 2013, p. 27). These relationships may be drivenbyamotivation toacquirecustomers, toretain customers, or to boost sales. Examples of categories of relationships include personal assistance, dedicat- ed personal assistance, self-service, automated services, the creation of communities, or the co- creation of new content. For Lantmäteriet, the Swedish government’s land registry authority, the pilot workflow powered by ChromaWay streamlined the process of transacting real estate. The digital ledger records each step of a real estate transaction as well as the property title. The application can also be accessed by bank representatives as well as by real estate agents and contains secure information that is up-to-date and easy to access. Lantmäteriet remains involved in the purchase throughout the process–—rather than intermittently–—and fulfills its aims of creating greater confidence and transparency in its dealings with Swedish citizens (Cheng, Daub, Domeyer, & Lundqvist, 2017). 3.5. Revenue streams The fifth building block element of a business model is the revenue streams. The revenue streams block represents (Osterwalder & Pigneur, 2013, p. 30): The cash that a company generates from each customer segment. There are two kinds of revenue streams: Transaction revenues result- ing from one-time payments and recurring rev- enues resulting from ongoing payments to either deliver a value proposition to customers or provide post-purchase customer support. ABI Research (2018) estimated that $10.6 billion in revenue will be generated by blockchain projects by 2023, mainly from software sales and services (Mearian, 2018). Technology companies that pro- vide blockchain-related professional services derive revenues from transaction fees for activity on a network, service level agreements for enterprise clients, or platform fees for software-as-a-service (SaaS) contracts. The greatest revenues from block- chain, however, have been derived from crypto- crowdfunding, using initial coin offerings (ICOs). An ICO is a form of fundraising that uses the power of cryptocurrencies and blockchain-based trading and provides an alternative to classic debt/capital funding as provided by venture capital and private equity firms and banks. An ICO allocates tokens instead of shares to the early investors in a business. These tokens can be traded on an aftermarket and all transactions are verified on a blockchain. In 2017, 800 ICOs raised over $5 billion (CB Insights, 2018), whereas in the first 5 months of 2018, a total of 537 ICOs closed successfully with a volume of $13.7 billion (PwC, 2018a). 3.6. Key resources and activities Osterwalder and Pigneur (2013, p. 34) defined key resources as “the most important assets required to make a business model work.” These are the re- sources that create the value proposition, reach markets, maintain relationships with customer seg- ments, and earn revenues. These resources may be physical, financial, intellectual, or human. Key ac- tivities encompass all activities required to deliver value (i.e., how a firm transforms the resources in value-creating ways). While resources and activities are considered as two separate elements in the Osterwalder and Pigneur (2013) framework, we discuss them jointly in this section because these two elements are tightly linked. Blockchain technologies require firms to recon- sider the key resources that make up their business model. In the following paragraphs, we discuss two aspects of how blockchain technologies influence resources and activities. The first aspect concerns the opportunity to make resources more fluid, al- lowing firms to move away from the traditional ownership and to access resources only when re- quired. This opportunity is especially pertinent to the application of public blockchain technologies in which, as described earlier, anyone can transact with another party in a peer-to-peer network. In some cases, firms can refrain from investments in IT infrastructure build and maintenance because, in the case of public blockchains, the network pro- vides these resources and processes. Furthermore, both applications of public and private/federated blockchains enable firms to automate processes that were previously manual, enabling human resources to focus on other, more value-added ac- tivities. Examples of these processes include docu- mentation, verification, and audit reporting. The second important aspect of how resources and activities can be affected by blockchain technologies is when the users provide many of the key resources and processes and use block- chain technologies to facilitate resource ex- change. Using the example of smart contracts in real estate transactions, resources such as human capital (e.g., knowledge, skills, experience) and physical capital (assets) are provided by the trans- acting parties while blockchain technologies facilitate the peer-to-peer exchange of these re- sources. 3.7. Key partnerships The building block key partnerships describes “the network of suppliers and partners that make the business model work” (Osterwalder & Pigneur, 2013, p. 38). These partnerships may take forms such as strategic alliances, joint ventures, or buyer- supplier relationships to ensure reliable supplies. On the one hand, the use of blockchain may entail the disintermediation of traditional intermediaries (e.g., banks, notaries, currency exchanges) or transform financial institutions (e.g., credit card companies). The use of blockchain can also enable the addition of new partners such as technology companies that develop application programming interfaces (APIs) and software development kits (SDKs), and maintain the transactional algorithms. Centbee developed a merchant payment ecosystem in South Africa to enable retailers to quickly and easily accept bitcoin at point of sale without re- quiring the installation of additional terminal hard- ware. Blockchain also facilitates peer-to-peer partnerships between businesses, therefore strengthening and extending supply chains. Figure 2 summarizes the impact of blockchain technology on a firm’s business model. 3.8. Cost structure The final building block is the firm’s cost structure. The cost structure “describes all costs incurred to operate a business model” (Osterwalder & Pigneur, 2013, p. 40). Blockchain implementa- tions can reduce transaction costs such as negotia- tion costs and search costs, and eliminate the costs of intermediaries. In the financial services industry, blockchain technologies are expected to allow for annual cost savings of $15—$20 billion by 2022 (Gregorio, 2017). These savings are the result of a reduction in IT infrastructure costs and the Figure 2. The blockchain and the business model canvas elimination of manual processes that did not add much value to the firm. Implementations of blockchain to manage finan- cial transfers can shorten the authorization holds currently implemented in banking and credit card processing. Authorization holds can hold up funds for several days. Transaction consensus operation speeds can reduce these holds to mere minutes in public blockchain protocols. On private block- chains, these holds are reduced to microseconds (Vukoli´c, 2018). Operations powered by blockchain require fewer manual steps in aggregating, amend- ing, and sharing data, or providing regulatory re- porting and audit documents. Employees can, therefore, focus on activities that add more value and generate greater revenues while consumers save time and money. Citizens in Sweden who ne- gotiate a home purchase by using a blockchain- powered smart contract and exclude previously required third parties from the transaction will save money and time during the transaction. While our previous discussion considered the business model elements separately and relied on different examples for illustration, we close this section with an explanation of the impact of blockchain technologies by looking at one case study: How is blockchain application influencing Walmart’s business model? Walmart recently launched a blockchain solution to detect and re- move recalled food from its products list and track every bag of spinach and head of lettuce (Corkery & Popper, 2018). The system is powered by IBM’s Hyperledger blockchain-based supply chain tracking system technology. The solution is implemented in response to a vexing business problem: tracing and immediately removing from shelves any food that is harmful to shoppers and removing only food that is harmful while leaving items that are safe to eat on the shelves to be sold. Upon completing a pilot program with 25 stock keeping units (SKUs) and 10 partners, Walmart is now bringing more than 100 suppliers into an im- mutable and transparent ledger that can track food from farm to store in seconds. Walmart expects to include additional products “on the scale of 50,000 to 70,000 SKUs” (Mearian, 2018). It is instructive to review the potential of this major project through the lens of the business model canvas by Osterwalder and Pigneur (2013). The value proposition to Walmart’s consum- ers is that of increased food safety while keeping Walmart’s promise of Everyday Low Prices. Wal- mart’s dominance in the food retail sector enables it to retain its profit formula with its revenue model protected, and cost structure, margins, and inven- tory turnover unchanged; in fact, automating the tracking of the supply chain using Hyperledger is expected to result in cost-savings for Walmart, thus increasing the potential for profit. The key resour- ces and processes that are part of the supply chain implementation also contribute to the customer value. Data about food grown in farms and destined for Walmart will be logged on the blockchain at every step of processing and transport, by using manual entry as well as with Internet of Things devices (Corkery & Popper, 2018). Each step in the supply chain is “not only recorded but trusted because of the features of blockchain are immuta- ble and use a consensus mechanism” (Mearian, 2018). The implementation of the blockchain-powered tracking system enables Walmart to reduce the length of time required to trace the origin of fresh food–—from the shelf all the way back to the farm–—from 7 days to only a few seconds (Mearian, 2018), enabling it to act swiftly in case of any contaminations at source. Well-trained store em- ployees will contribute to the swift removal of tainted food from local shelves. The implemented blockchain-based system is therefore expected to improve the value proposition to Walmart’s custom- ers of a ready supply of inexpensive, fresh, and, most importantly, safe foods. 4. Discussion The critical mass of blockchain technology adoption has yet to be reached. Few blockchain projects have moved from a pilot stage to full implementation. Recent research by Gartner reveals that only 1% of responding CIOs reported any sort of blockchain adoption, and only 8% of respondents are engaging in short-term planning and pilot planning (Gartner, 2018). A report by Deloitte (2018a) is more positive: “While a majority (74%) of our survey respondents report that their organizations see a compelling business case for the use of blockchain technology, only 34% say their company has initiated deploy- ment in some way.” According to Deloitte (Schatsky, Arora, & Dongre, 2018), several obstacles continue to limit the mainstream adoption of blockchain technology: Blockchain operations are viewed as slow. De- spite their ability to offer a significant increase in efficiency, when compared to standard multiday authorization holds by banks and credit compa- nies, consensus operations still generate mi- nutes-long delays on a public distributed ledger network. The additional layers of obfuscation and encryption required to keep data confidential● add to the processing time (Marvin, 2017). This has a bearing on customer value creation, as consumers and businesses expect speedy, nearly instantaneous operations. News reports about data breaches on cryptocur- rency trading platforms, contrasted with corpo- rate requirements for ironclad data security across disparate systems, are limiting managers’ consideration of the technology.● Blockchain architectures are not standardized. There were more than 6,500 active blockchain projects listed on GitHub in 2018, with projects based on different protocols, consensuses, priva- cy measures, and written in different coding languages.● Given this lack of standardization, establishing business connections between firms by using blockchain architectures is difficult because of the challenges of integrating different architec- tures.● Costs continue to be high: blockchain applica- tions, developed to customer specifications, re- quire expensive specialized developers and require complex integration efforts.● The constraints brought by regulation are an obstacle to consideration, particularly for inno- vative projects such as smart contracts. Regula- tory constraints, specifically in financial and medical applications, prevent the rollout of smart contracts in several countries.● The final obstacle is the lack of a critical mass of users, enabling the mass adoption of blockchain technology. Initiatives such as Everest’s large- scale humanitarian projects for the disenfran- chised are built on the belief that using block- chain to address these needs will accelerate a wider use of the technology.● However, these obstacles to blockchain adoption are being overcome by recent developments in regulatory easing, collaborations between orga- nizations, as well as new development in more efficient blockchain architectures (Schatsky et al., 2018): New consensus mechanisms used in Hyperledger, Stellar, R3, and Ripple implementations increase throughput and performance, reducing processing time from minutes to milliseconds (Vukoli´c, 2018). Consensus is the method by● which participants in a blockchain network come to agree that the transactions recorded in the digital ledger are valid. Standardization efforts continue. There are cur- rently more than 60 blockchain consortia initiat- ing projects. These consortia bring together hundreds of private and public companies and government organizations eager to explore the potential of blockchain applications. Some de- velop use cases, set standards, develop infra- structure and applications, and operate blockchain networks. Others educate, conduct research, or provide advice to their members. This is a positive sign, as “the value of the network increases with the number of users” (Deloitte, 2018a). Some examples of these con- sortia include the Enterprise Ethereum Alliance with more than 600 members and the Hyperledg- er Foundation, which includes over 250 organiza- tions. The number of companies that collaborate with one another outside of established consortia is also increasing.● The complexity and cost of blockchain implemen- tations are both declining. Amazon, IBM, and Microsoft offer cloud-based implementations of blockchain as well as templates at a cost that is lower than specialized development (Patrizio, 2018). These templates ease the setup process, reduce implementation time from months to days, and will enable organizations to reduce the costs of these initiatives.● Finally, regulatory support is improving. Legisla- tion has been passed in several states in the U.S. to facilitate the adoption of blockchain for some medical applications (Deloitte, 2018a).● The recent developments noted in Schatsky et al. (2018) stem from the growth in the number of collaborations and the increase in the formation of consortia. Organizations are carefully evaluating the blockchain movement and launching pilot proj- ects as proofs of concept. Meanwhile, entrepre- neurs issue and sell blockchain tokens and reshape entrepreneurship and innovation in fund- raising, investing, community building, and open sourcing (Chen, 2018). A major decision for orga- nizations undertaking blockchain projects lies in the selection of the blockchain model: private or pub- lic? The two types of blockchains that we described are differentiated by unique selling propositions: a private blockchain can save an organization time and cut costs, whereas a public blockchain has the potential to disrupt an industry, either through disintermediation, as is the case in financial appli- cations of Bitcoin and other cryptocurrencies, or by the creation of new business models (Tamayo, 2017). Despite the small number of implementations, it is still encouraging to see an increasing interest by companies to explore opportunities with block- chain technology. In his widely-discussed and de- bated article “IT Doesn’t Matter,” published over 15 years ago in Harvard Business Review, Carr (2003, p. 43) noted that companies “steal a march on their competitors by having a superior insight into the use of a new technology.” New technolo- gies offer more efficient operating methods and lead to larger market changes. However, the win- dow for gaining this advantage is open only for a short time. “By the end of the build-out phase,” Carr (2003, p. 43) suggested that “opportunities for individual advantage are largely gone.” There- fore, those executives who see a compelling case to begin a blockchain pilot should begin sooner, rather than later. Whether the new blockchain projects lead to incremental or radical innovations is also worthy of examination. A useful model for categorization is Henderson and Clark’s (1990) framework for defin- ing innovation, based on the impact technological change has on a firm’s established capabilities. We have observed in our small sample of case studies that consortia-led blockchain projects have the potential to lead to architectural innovations, whereas public blockchain projects can engender radical innovations. Architectural innovations re- configure established systems to link existing com- ponents in a novel way. Walmart’s use of a private blockchain can be considered an architectural in- novation, as it enables it to create “new interac- tions and new linkages with other components in the established product” (Henderson & Clark, 1990, p. 12). It relays information with greater velocity and credibility about the origins and freshness of Walmart’s supply of spinach and lettuce. Radical innovation, by contrast, is based on different prin- ciples and leads to new applications and markets such as those fueled by the recent surge in ICOs. It also enables the successful entry of new firms or the creation of a new industry (Henderson & Clark, 1990). Safello’s Bitcoin exchange for European cus- tomers and ChromaWay’s use of smart contracts for real estate transactions are also examples of radical innovations. One limitation of our article is the early-stage nature of the implementations under discussion and the resulting small sample of active use cases. Many projects are early pilots and have not yet achieved full rollout. As more projects move from pilot stage to rollout, it will be interesting to explore which industries will create architectural innovations or generate radical innovations and to confirm wheth- er these will be supported by private or public blockchains. Empirical research can also explore which parts of the business model canvas are most affected by the implementation of a blockchain: customer seg- ments, value propositions, channels, customer re- lationships, revenue streams, cost structures, key resources, key activities, or partnerships. An addi- tional area for further investigation will be to ex- amine whether a private or a public blockchain offers greater benefits for each of these elements. Such an investigation will require a larger sample of companies running applications on blockchain than is currently available. 5. Concluding remarks We began this article with an explanation of block- chain technologies and continued with a description of their impact on a firm’s business model. With a focus on an audience of general managers and exec- utives, rather than blockchain experts, we highlight- ed how blockchain technologies operate and explained the two major types of blockchain–—public and private–—currently in application in practice. In addition, we clarified some of the blockchain-related terminologies, thus adding to the conceptual clarity of the construct. The main contribution of our article lies in pre- senting the influence blockchain technologies can have on a firm’s business model. By using the well-established business model framework from Osterwalder and Pigneur (2013), we explained how the two types of blockchain technologies de- lineated in our article present opportunities for value creation for a firm’s business model (see Figure 2). We used illustrative examples, derived from our investigations of startup companies that pilot blockchain technology solutions in the areas of real estate transactions, payment systems, curren- cy exchange, supply chain management, and appli- cations for the billions of unbanked citizens in the developing world. We also identified directions for future research on the types of innovation generat- ed by blockchain innovations and an opportunity for empirical examination of impacts to the elements of a firm’s business model once a larger sample of blockchain implementations can be formed. Managers can use the business model as an ana- lytical framework to assess the impact of blockchain technology for their existing business model; alter- natively, they may use the canvas to reinvent or develop completely new business models. This ex- ercise is useful because the addition of blockchain technology can affect how firms may run, operate, and compete. Managers must discern the potential impacts so as to not be left behind (Angelis & Ribeiro da Silva, 2019). Blockchain holds promise in many organizational applications with several promising pilot projects underway. These focus on applications such as sup- ply chain, Internet of Things, digital identity, digital records, digital currency, payments, and voting (Deloitte, 2018b). A survey by Credit Suisse (2016) identified the leading aims of blockchain technology pilots as the reduction of operational costs, shorter settlement time, reduction of risk, new revenue opportunities, and a reduction in the costs of capital. Most of the current pilot projects pertain to financial services (PwC, 2018b). Although many of these projects have improved operations, there have also been instances of fraud, particularly in the cryptocurrency blockchain sector in the area of ICOs. Although most ICOs are legitimate efforts to raise funding for startups, with varying degrees of success, some ICOs have been fraudulent from in- ception and enabled fraudsters to abscond with tens of millions of dollars (Arnold, 2018). Applications outside of finance also seek to im- prove operations. Manufacturing companies seek to trace goods from purchase to delivery around the globe reliably and quickly. Healthcare providers yearn for immutable and traceable patient records, to reduce pharmaceutical and insurance fraud, and improve data exchanges in clinical trials. Public sector projects include not only land claims but also digital identity projects that will facilitate travel, citizenship records, and voting (Syeed, 2018). Additional pilots seek to improve operations for retailers and entertainment and media orga- nizations. Blockchain has an opportunity to create benefits beyond digital currencies and influence all sectors of the economy. Managers are well advised to continuously moni- tor blockchain technologies to assess their impact and consider the strategic importance of blockchain for their business. If they do not do so, they will lose their competitive edge to those managers of firms, whether new or old, who understand blockchain and who are ready to innovate their business models. When evaluating a business case for blockchain adoption, executives and managers should ask the following questions: What are the sources of value that blockchain can provide?● How will using blockchain align with the orga- nization’s goals and strategies? Does the organization have the right people, partnerships, and resources in place?● ● Will the organization reach new customers, strengthen relationships, or increase sales?● Will blockchain help service customer needs bet- ter and offer more value?● Will blockchain tighten relationships inside the supply chain?● Could smart contracts be used to transact faster, accelerate payments, or reduce costs?● Will blockchain improve organizational cost structures?● · Can it integrate within the existing IT ecosystem? Will blockchain help reduce search costs and negotiation costs?● Will blockchain enable the organization to com- pete more effectively?● Executives who are considering initiating block- chain projects will do well to consider the align- ment of their project with their overall business strategy and reflect on which element of their business model will become most improved by the implementation. To help with this important task, our article provides a structured framework by which to assess the impact of blockchain technology on each business model element. In addition, man- agers will need to decide whether an open or a closed blockchain will help them realize their orga- nizational objectives. With a growing number of consortia, a decrease in complexity and costs of implementation, and a larger number of pilots and experiments underway, blockchain is advancing rapidly toward greater acceptance. Astute execu- tives and managers should understand how the technology fits in their business and how it can help improve operations in order to capture its advan- tages ahead of their competitors. References ABI Research. (2018, October 2). Spurred by digital transforma- tion and smart technologies, blockchain revenues to hit US $10.6 billion by 2023. 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Harvard Business Review, 86(12), 50—59. Kessels, B. (2018). The private blockchain fallacy. Available at https://berk.es/2018/09/19/the-private-blockchain - fallacy/ Kietzmann, J. (2019). From hype to reality: Blockchain grows up. Business Horizons, 62(3), 269—271. Larios-Hernandez, G. (2017). Blockchain entrepreneurship op- portunity in the practices of the unbanked. Business Hori- zons, 60(6), 865—874. Levitt, T. (1974). Marketing for business growth. New York, NY: McGraw-Hill. Marvin, R. (2017, August 29). Blockchain: The invisible technol- ogy that’s changing the world. PC Magazine. Available at https://www.pcmag.com/article/351486 / blockchain-the-invisible-technology-thats-changing-the-wor Mearian, L. (2018, October 1). Q&A: Walmart’s Frank Yiannas on the use of blockchain for food safety. Computerworld. Avail- able at https://www.computerworld.com/article/3309656 / emerging-technology/qa-walmarts-frank-yiannas-on-the- use-of-blockchain-for-food- safety.html Montecchi, M., Plangger, K. A., & Etter, M. (2019). It’s real, trust me! Establishing supply chain provenance using blockchain Business Horizons, 62(3), 283—293. Nakamoto, S. (2008). Bitcoin: A peer-to-peer electronic cash system. Available at https://bitcoin.org/bitcoin.pdf Osterwalder, A., & Pigneur, Y. (2013). Business model generation: A handbook for visionaries, game changers, and challengers. Hoboken, NJ: John Wiley & Sons. Panetta, K. (2018, August 16). 5 trends emerge in the Gartner Hype Cycle for emerging technologies, 2018. Gartner. Available at https://www.gartner.com/smarterwithgartner/5-trends - emerge-in-gartner- hype-cycle-for-emerging-technologies- 2018/ Paschen, J., Kietzmann, J., & Kietzmann, T. (in press). AI goes to work: How the building blocks of artificial intelligence impact business and industrial marketing. Journal of Business and Industrial Marketing. Patrizio, A. (2018, March 27). The top 10 blockchain as a service providers. Datamation. Available at https://www . datamation.com/data-center/top-10-blockchain-as-a - service-providers.html PwC. (2018a). Blockchain is here. What is your next move? Available at https://www.pwc.com/gx/en/issues / blockchain/blockchain-in-business.html PwC. (2018b). Industries seen as leaders in blockchain technolo- gy development worldwide as of 2018*. Statista. Available at https://www.statista.com/statistics/920747/worldwide - blockchain-technology-development-leading-industries/ Schatsky, D., Arora, A., & Dongre, A. (2018, September 28). Blockchain and the five vectors of progress. Deloitte. Avail- able at https://www2.deloitte.com/insights/us/en/focus / signals-for-strategists/value-of-blockchain-applications- interoperability.html Swan, M. (2015). Blockchain: Blueprint for a new economy (1st ed.). Sebastopol, CA: O’Reilly Media. Syeed, N. (2018). Is blockchain technology the future of voting? Bloomberg. Available at https://www.bloomberg. com/news/articles/2018-08-10/is-blockchain-technology- the-future-of-voting The Economist. (2015, October 31). Blockchains: The great chain of being sure about things. Available at https://www . economist.com/briefing/2015/10/31/the-great-chain-of - being-sure-about-things Tamayo, D. (2017). IBM blockchain explained. Available at https://www.slideshare.net/DiegoDiaz49/1-ibm - blockchain-explained Tapscott, D., & Tapscott, A. (2016, May 10). The impact of the blockchain goes beyond financial services. Harvard Business Review. Available at https://hbr.org/2016/05/the - impact-of-the-blockchain-goes-beyond-financial-services Vaughn, W. (2015, July 31). Open vs closed blockchains: Let’s end this madness. Available at https://medium.com /@ WayneVaughan/open-vs-closed-blockchains-let-s-end-this- madness-8313e4095ead Vukoli´c, M. (2018, February 2). Behind the architecture of Hyperledger Fabric. IBM. Available at https://www.ibm. com/blogs/research/2018/02/architecture-hyperledger- fabric/ AirFox (A): Embracing the Blockchain and an ICO In June 2017, Victor Santos, the 26-year-old CEO of AirFox, paused to catch his breath as he approached the Harvard Launch Lab early in the morning, just as the sun was rising. He was considering publicly releasing an announcement that his company would undertake a dramatic pivot and change its business model. If he chose to go through with it, the announcement would have profound consequences. Santos knew that a key board member would resign and other employees would likely follow, and that he would be embarking into uncharted territory for his fledging startup. Outside the building’s entrance, Santos asked himself one more time whether it was the right decision and whether the risks would be simply too great. AirFox was an early-stage startup that sold software to wireless carriers. The company had signed three enterprise customers, was generating revenue, and had a pipeline of incoming deals. However, AirFox was on track to run out of cash in three months. Santos had already laid off employees and dramatically reduced wages for the remaining team members. After months of trying, Santos had failed to find new investors to keep the company afloat. He believed that pivoting to use an emerging technology called blockchain and executing an ambitious financing through an Initial Coin Offering would be the best path forward for AirFox. But doubts were starting to creep into his mind. Was he willing to bet the company that he was right? Founding AirFox Santos was born in Brazil and moved to the U.S. with his family when he was 12. He attended the University of California–Berkeley and graduated with a BS in business administration in 2013. While still a student, he cofounded Ciao, a telecom services company with operations in Brazil. The company saw modest success and grew to millions of dollars in revenue. But after graduation, Santos wanted to work for Google to learn from the best, joining as a Product Marketing Manager in 2013 while retaining a connection to Ciao. Then, in 2014, he returned to Ciao full-time as its COO and embarked on launching its U.S.-based telecom service expansion. In 2014, four major wireless carriers (Verizon Wireless, AT&T, Sprint, and T-Mobile) dominated the U.S. cellular network market. These leading players sold wireless plans to consumers as well as excess network capacity wholesale to small brands. The small wireless brands were called Mobile Virtual Network Operators (MVNOs) because they operated a virtual network rented from another company rather than owning their own network equipment and towers. They often served niche populations, for whom they could design differentiated plans and pricing, including plans marketed to lower- income consumers.1 Santos planned to launch a new U.S.-based MVNO aimed at low-income customers. Subscribers would be able to lower their monthly costs by watching advertisements. However, Ciao soon confronted serious challenges. Ciao Brazil, the MVNO’s parent company, faced financial trouble and an exodus of management talent. The new U.S. plan also had difficulty winning a large number of subscribers, and it suffered from high customer acquisition costs due to fierce competition. Santos concluded that his team’s core competency lay in advertising software that could subsidize smartphone plans. Rather than try to run a mobile operator and market telecom services, Santos thought it would be easier for Ciao to market an app. The app would show users ads on their smartphone lock screen and reward them per ad viewed by subsidizing their cell phone bill or paying out a cash reward. A software-based business model would be more scalable because the business could distribute the app to millions of users without asking those users to change cell phone plans or buy new phones. Santos decided to pursue this new path as a new company, unencumbered by Ciao’s financial baggage. Santos branded the new company AirFox. Launching and Scaling AirFox In 2015, the vision behind AirFox was to enable wireless carriers to distribute the startup’s ad- serving software to their subscribers, integrating with the carriers’ back-end systems to handle advertising, payments, and billing. The carrier would distribute the software to subscribers by either installing it on their phones pre-sale or encouraging subscribers to download the app post-sale. Once the software was installed and the ads were enabled to display on the phone’s lock screen, ad revenue would be generated to subsidize the subscribers’ plans. The business model was a revenue split between AirFox and the carrier. End users would benefit by receiving cheaper plans subsidized by the advertising. The carrier would benefit by maintaining more competitive rates without sacrificing margins. Santos believed that selling to carriers would offer AirFox several advantages over marketing to users directly. First, AirFox would be able to scale with less investor capital, because the wireless companies could more efficiently distribute the lock screen app to end users. Second, partnering with carriers created an opportunity to sell additional software. In particular, Santos believed AirFox could build and sell more flexible application programming interfaces (APIs)a that would allow its MVNO customers to offer different data costs for different smartphone apps, thus creating more customized offerings. The ability to customize plans, pricing, and packaging would augment the MVNOs’ natural advantage of being able to pursue niche markets in the face of competition from dominant carriers. There were over a thousand MVNOs and small carriers globally.2 Santos was confident: “They all wanted revenue streams that weren’t dependent on the underlying carrier and the distribution.” a APIs were a set of programming tools that could help third parties work with the same underlying software. 2 AirFox’s goal was not simply to make money. Santos and the employees he recruited were also motivated by AirFox’s social mission to make smartphone data more affordable for low-income users. In a 2015 survey of smartphone owners, Pew Research found that financial constraints led 23% of respondents to cancel or shut off their cell phone service. The survey further found that 37% of smartphone owners reached their maximum allowable data limit. Americans who were less educated, lower-income, or nonwhite were especially vulnerable to limited connectivity.3 The AirFox team was energized to make the internet more affordable and accessible, initially for Americans and then eventually for billions of users globally. Santos pursued product development, customer acquisition, and investor financing at the same time. He applied and was accepted to Techstars Boston, an accelerator program that invested in and coached early-stage startups in exchange for equity. Techstars helped AirFox with its strategy, recruiting, and business development efforts, as well as exposure to potential investors. After the program ended in the summer of 2016, AirFox closed a $1.1 million seed round from respected local angels and seed venture capital firms. The team was ecstatic to sign their first carrier contract after just three weeks of discussions and saw it as a sign of validation for AirFox’s business model. AirFox was able to integrate its software with the pilot customer in just two months. Three more carrier deals followed, as well as a pipeline of interested contacts at other carriers. By December 2016, AirFox had built its user base with the initial customers and was generating $40,000 in monthly recurring revenue, earning $0.15 to $0.80 monthly per active paid user. The pipeline of potential deals, however, did not convert to revenue quickly over the course of 2017. Santos explained, “The sales cycle was proving to be brutal. Among the deals AirFox successfully closed, it would take 6 to 10 weeks to close the sale. And that was only the beginning. It would be a further 8 to 12 weeks for integration, followed by 4 to 8 weeks to agree on a launch plan, and then another 4 to 8 weeks to ramp up and saturate the customer’s base of subscribers.” When launching with a new carrier, AirFox would send texts and notifications to subscribers to inform them about the new program. Generally, 20% to 40% of subscribers would uptake the app, with 70% to 80% retention. The slow pace of converting the carrier pipeline to revenue made it clear that follow-on financing would be a challenge. Santos wanted to raise several million dollars of Series A capital from institutional investors. As he met potential backers, he found that investors were not sufficiently impressed with the startup’s progress or its fundamental business model. “We were pitching to VCs [venture capitalists] and not getting anywhere,” Santos recalled. “Our end users were low-income, and our customers were small carriers with a long sales cycle.” As one team-member put it, “We were making some money, but not enough money to hit the typical Series A milestones.” Santos believed he could attract investors for the round if AirFox could accelerate the closing of new accounts, particularly one potentially lucrative contract with a prospective carrier that seemed to be falling into place. Santos decided to raise a small bridge loan to finance the business for a few extra months, during which AirFox could close the new deals that would solidify its case for a Series A. In January 2017, he landed an introduction to a partner at a seed-stage venture fund. Impressed with AirFox, the partner committed $500,000 as a lead investor for the bridge. This development convinced several smaller backers to commit to the financing round, including the micro-seed fund that led AirFox’s seed round and held a seat on AirFox’s board of directors. In anticipation of the new financing, which had grown as large as $1 million, Santos began hiring. He expanded the engineering team and recruited an experienced Chief Technology Officer (CTO) from the West Coast. 3 Down to the Wire In April 2017, Santos had secured the lead investor’s signature on the bridge note documents and sent him wiring instructions; the investor had filled out the wire and returned it with the requisite signatures. However, the bank transfer did not go through. When Santos inquired as to the status of the funds, he learned that the investor was in litigation with his business partners, and a Delaware court had frozen his bank account. With the funds frozen, the investor had to back out of the financing, causing the other bridge investors to step away as well. The existing investors who had sponsored AirFox’s seed round offered emotional support but did not step up financially because they did not have deep enough pockets to carry AirFox on their own. One team member remarked wryly, “It was nice to have our investors’ support. However, it didn’t pay our engineers’ salaries.” The day after the financing fell through, Santos called an emergency board meeting. The company had a gross burn rate of $130,000 per month, seven full-time employees, numerous contractors, and only $100,000 left in the bank. (See Exhibits 1a and 1b for AirFox financials.) To save the company, Santos proposed a plan to the board that would dramatically reduce salaries; lay off five contractors, most of whom were supporting engineering; and let the new CTO go. After the board meeting, Santos approached the remaining team members. He asked them to work at minimum wage for two months and then at half salary for three months afterward. To make up for the lost wages, the board offered the remaining employees triple their original stock option grants. Santos also promoted two engineers to more senior roles, including elevating engineer James Seibel to CTO. On the financing side, Santos pursued dual tracks. He scrambled to find new cash infusions to continue operations and began discussions with larger companies about an acquisition. Santos approached his old employer, Google, about an acqui-hire (i.e., an acquisition in name only, but really a wholesale hiring of the team rather than a substantial payment for the company itself). He also spoke about mergers with several other startups that served the low-income mobile market. Unfortunately, no potential acquirer or partner was interested enough to make a satisfactory offer in such a short time frame. Finally, Santos approached his two existing MVNO customers for funding. When an initial conversation with a customer went nowhere, Santos changed his approach when talking with the second partner. “I decided to hold my cards closer to the chest,” Santos recounted, explaining how he chose to deploy a more nuanced pitch. “I told them, ‘We have a note open. This is the opportunity of a lifetime, and based on our relationship, we want you to lead with $1 million.’” The customer decided to invest $250,000, buying AirFox another six months at its reduced burn rate. Santos was relieved to receive the new commitment, but he knew it was just a temporary lifeline. To grow the company, Santos needed more cash. However, as he pitched more and more VCs, Santos found they were still not interested. AirFox had a few more months of runway, but Santos felt unsure of his long-term plan without additional capital. He reflected, “This was the moment to step back. Breathe. And figure out, ‘What the heck do we do?’” Brainstorming a Pivot In May 2017, Santos asked Seibel and two other employees to meet him in a conference room, take stock of the situation, and brainstorm together about what could be next for AirFox. They decided to first focus on the assets they felt they already had. Santos recalled, “We wrote out on a whiteboard the assets we had. Technology, Team, Contracts. What can we make with these?” (See Exhibit 2 for a mock- up of the whiteboard.) Santos recalled, “We kept coming back to ‘Who is our customer?’ and ‘What problem are we trying to solve?’ We saw that we were struggling with reaching the end user to help them with their finances by selling through the carriers. We wondered: Can we remove the carriers? Maybe take more risk? What if we sold direct to consumers? This was an option, but we would need a lot more money.” The team considered whether they could help carriers set dynamic pricing based on cell phone usage data. They considered the advertising exchanges they integrated with, and how these exchanges might be interested in acquiring rare data on AirFox’s lower-income core segments. Over the course of the discussions, the group kept coming back to AirFox’s users. “What is their chief problem?” Santos remembers asking. “The problem they face is affordability.” This led the group to think about making small loans, called microloans, to low-income subscribers who wanted to purchase more minutes and data. The talk of microloans prompted Seibel to share his hobbyist interest in blockchain—a new set of software protocols that created and maintained ledgers. Blockchain was an innovation with growing popularity among technologists and investors. Advocates believed it could allow transactions and contracts to occur without relying on centralized third parties, such as banks. However, it had few proven, real-world use cases at the time. Santos wrote the word “blockchain” on the whiteboard and asked, “What could we use this for?” “Honestly, I am not sure yet,” Seibel responded. “Right now, the most popular applications are creating payment systems and creating new currencies. Maybe we could use it to help users pay their bills. Or keep track of their microloans. There are a lot more uses. One day, this technology will be big.” “OK, let’s leave blockchain on the whiteboard for now,” Santos replied. “We can research it more later.” They broke to grab lunch. Several bites into his sandwich, Santos saw a text message from Seibel on his screen. It read, “BOOM,” and contained a hyperlink to a TechCrunch article titled “Former Mozilla CEO raises $35M in under 30 seconds for his browser startup Brave.”4 The story immediately caught Santos’s attention. According to the article, Brave was building a browser that used blockchain and had successfully raised $35 million in crowdfunded capital. “For the first time, I felt something real was going on here,” Santos remembered thinking. “The former CEO of Mozilla has a serious reputation and raised a lot of money. I decided to drop everything and read all I could about blockchain and decentralized ledgers.” 5 Blockchain Decentralized Ledgers The term “blockchain” referred to a succession of data records (“blocks”) that were individually time-stamped and referenced each other, forming a ledger (“chain”) of data entries.5 Rather than a single copy stored in a central sever, thousands of identical copies of the ledger were stored in various computer nodesb across a broad network.6 By removing reliance on a central server, blockchains were theoretically more trustworthy than traditional centralized database technologies. There would be no chance for an entity controlling the central computer to manipulate the data, transcribe an error, or be hacked.7 Blockchain could also theoretically be more open than other database technologies. With decentralized data, no company or government would be able to make data access difficult for its own benefit.8 Further, electronic transactions could be made without relying on trust, because the public ledger contained a full history of the transactions, sealed cryptographically and immutable. These properties of greater trustworthiness and openness through decentralization were attractive, and some blockchain champions saw the technology as a powerful business process improvement tool. To them, blockchain could help reduce costs and decrease wasted time in processes where multiple organizations needed to share data and agree on the data’s accuracy.9 Other blockchain advocates saw society-wide implications for how entire organizations were financed, built, and managed.10 Some proponents saw it as “the next internet.”11 Two professors wrote in a Harvard Business Review article about blockchain: The parallels between blockchain and TCP/IPc are clear . . . TCP/IP unlocked new economic value by dramatically lowering the cost of connections. Similarly, blockchain could dramatically reduce the cost of transactions. It has the potential to become the system of record for all transactions. If that happens, the economy will once again undergo a radical shift, as new, blockchain-based sources of influence and control emerge.12 Building Blockchains Computers on a blockchain network all operated according to a protocol, which was a shared set of rules that made data mutually intelligible between network participants. A central part of the blockchain protocol was to provide incentives to encourage participants to maintain the decentralized nodes and ledgers and a consensus mechanism to enforce any rules and incentives. (See Exhibit 3 for an overview of how blockchains worked.) Blockchain protocols generally provided a core set of guarantees: 1. Past entries would be accurately maintained. 2. New entries that followed the rules would be validated before broadcasting to all of the nodes in the network. b The term “node” referred to a point in a communications network that could communicate with other points. c Transmission control protocol/internet protocol (TCP/IP) —a common protocol for communication between computers across networks—was one of the key innovations that enabled the internet. 3. Incentives would ensure validators act correctly.13 Bitcoin Launched in 2009, Bitcoin was the first blockchain protocol to meet these guarantees. After the Bitcoin blockchain was created, other blockchains rapidly followed, such as Ethereum and Ripple, inspired by the Bitcoin protocol and architecture. The Bitcoin network was designed as a payment network. The network allowed users to pay each other with a digital currency. The digital currency was called bitcoin (and written with a lowercase ‘b’ to distinguish it from uppercase ‘B’ references to the Bitcoin network or Bitcoin protocol).14 There were no physical bitcoin coins or even digital files of bitcoins. There was only a ledger of bitcoin transactions. Bitcoins could be owned by a person only if that person had an entry in the ledger in which he or she had received bitcoin in the past and not yet spent it.15 For the payment network to be trustworthy, new entries to the public ledger needed to be validated to ensure two criteria: (a) nobody spent money from an account they did not own, and (b) nobody spent more bitcoin from an account than that account had previously received. The rules of the Bitcoin protocol were instantiated in software to ensure that both criteria were met in all new entries. The Bitcoin protocol ensured the first criterion, that nobody spent money from an account they did not own, by using public-key cryptography, a tool that functioned like a digital signature—easy for an initial party to produce and easy for outside parties to validate, but very difficult for an outside party to forge. Bitcoin users would have a private key that allowed them to “sign” data. Anyone viewing the signature could easily identify it with the signer’s digital identity, often called the signer’s public key. As long as the user was the only person in possession of his or her private key, nobody could impersonate that user.16 The Bitcoin protocol also ensured the second criterion, that nobody spent more bitcoin from an account than that account had previously received, by time-stamping every transaction. Data of several transactions would be grouped together into a “block” of transactions. Each block of data referenced the block before it in chronological order.17 Nodes on the Bitcoin network were able to check each new block against the chain of validated prior blocks to ensure nobody overspent their existing balance.18 If there were multiple chains of prior transactions that disagreed with one another and all claimed to be valid, nodes using the Bitcoin protocol adhered to a simple rule: believe the longest chain (i.e., the longest chain is the valid one). The Bitcoin protocol demanded that computers always use the latest time-stamped block on the longest chain of blocks as the true state of the ledger. In other words, the Bitcoin protocol accepted length of the chain as a proxy for validity.19 Using the longest chain as a proxy for validity had the benefit that all computers in the network could agree on which state of the ledger was valid, without a central clearinghouse and without independently validating dozens of blocks into the past to ensure that the accuracy of the chain was unbroken. However, the Bitcoin protocol needed measures to ensure that length-of-chain could serve as a dependable proxy. This was where Bitcoin’s incentive structure came in.20 To ensure that length-of-chain was a dependable proxy for validity, the Bitcoin protocol made it costly for a computer to propose new blocks. This way, a malicious party could not falsify entries to the ledger and then cheaply create enough blocks for the falsehood to become part of the longest chain. To do so, the Bitcoin network required proof-of-work to be part of any new block validation. Performing the proof-of-work involved long calculations that were expensive in both fixed-cost computer 7 hardware and variable-cost electricity. In order to propose more blocks than the honest actors, a dishonest actor would need to control a majority of the expensive computing resources in the network. In practical terms, this would make fraud prohibitively expensive and push the validators to act honestly.21,d In this way, the Bitcoin network stored data in a decentralized ledger of transactions and used incentives to maintain the ledger. It ensured that past data was immutable. It ensured that new entries would be checked for violations of the rules and that incentives would ensure that nodes acted correctly. The model first used by Bitcoin would inspire all the blockchain projects that followed. Blockchain beyond Bitcoin Running the Bitcoin blockchain came with costs and inefficiencies. First, there were direct computing and power costs required for the proof-of-work. Running a computer to validate transactions using proof-of-work was called mining. Mining heavily used electricity by using a lot of computing power. Estimates of Bitcoin’s electricity cost varied widely, but by some estimates Bitcoin miners used an amount of continuous electricity similar to that of Ireland in late 2017. There were some proposed solutions to reducing energy consumption without compro- mising security for other blockchain technologies, but Bitcoin had implemented none of them in 2017.22 Second, the Bitcoin network was slow compared with some centralized payment networks. In December 2017, Bitcoin took an average of 78 minutes to process a transaction, and processing time could spike to over 1,000 minutes on high-congestion days.23 According to some estimates, the theoretical maximum for the Bitcoin network was 3 transactions per second. In contrast, PayPal, an online payments processor, achieved 450 payments per second on Cyber Monday in 2016. Credit card network VisaNet achieved 1,667 transactions per second on average in 2016. A spokesperson for Visa claimed that, if needed, Visa’s platform had the capacity to process over 50,000 transactions per second.24 Third, private keys were not always stored securely. Hackers were sometimes able to steal private keys, resulting in massive thefts. In 2014, hackers stole the private keys for 850,000 bitcoin (worth $450 million at the time) from Mt. Gox, the leading bitcoin exchange at the time.25 In 2016, hackers stole $77 million worth of bitcoin from the popular exchange Bitfinex. The exchange assessed losses from its user base at 36% of users’ accounts.26 To avoid the possibility of theft, some Bitcoin users began using cold storage. This kept their private keys on a physical drive or hardware wallet disconnected from the internet entirely, which made rapid transactions difficult.27 Fourth, the Bitcoin network was open and participation was pseudonymous, which allowed criminal organizations to create accounts and use the currency to finance illegal activities without revealing their true identities.28 Specialized websites, such as Silk Road, began using bitcoin and similar currencies to facilitate the sale of illicit goods, such as hard drugs.29 Security analysts suspected that the military regime in North Korea was using bitcoin and other digital currencies to avoid financial sanctions.30 d To encourage validators to actually pursue the costly proof-of-work, successful validation was rewarded with a small amount of digital currency, either by a fee from the parties or by crediting the validator with newly minted currency. (Source: Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System,” Bitcoin, October 31, 2008, https://bitcoin.org/bitcoin.pdf, accessed January 2018.) 8 Despite the costs and inefficiencies of bitcoin, the underlying blockchain technology held significant promise and represented a transformational opportunity that some referred to as an innovative wave as large as the internet itself. The blockchain represented a platform with proxies for trust built in, such that peer-to-peer transactions could be conducted directly, independent from any centralized authority. The role of banks, governments, and other centralized institutions could be transformed if blockchain applications became mainstream methods for transferring money and completing transactions.31 Examples of innovative blockchain applications began to emerge around the world, taking the core innovation of Bitcoin and expanding it to create new distributed applications. For example, the Republic of Georgia was collaborating with a blockchain company to build a secure land registry on a decentralized ledger, making it tamper-proof regardless of the party in power.32 Finland began a project to implement a blockchain-based digital identification system to help securely track refugees, independent of their paperwork or passports.33 The United Nations kicked off a project in partnership with Microsoft and Accenture to build an identity system for the 1 billion refugees who did not have physical proof of citizenship or identity. “Without an identity you can’t access education, financial services, healthcare, you name it. You are disenfranchised and marginalized from society,” David Treat, a Managing Director in Accenture’s financial services practice, said in an interview. “Having a digital identity is a basic human right.”34 In 2017, the technology giant IBM deployed over 1,500 professionals working on over 400 blockchain projects.35 IBM sought to use blockchain to improve the accuracy of supply chains, financial services, and cybersecurity.36 Several large banks …