The hype surrounding the blockchain (the latest technology that is about to disrupt the business world) seems to be closely related to another hot topic-the Internet of Things. In the complex publicity reports, business leaders need to determine whether the combination of these two technologies, which are still in the early stages, can produce a sustainable competitive advantage.
In the joint research of Boston Consulting Group and Cisco Systems, our goal is to better understand how companies that build distributed IoT networks use blockchain. Our research shows that only a small number of companies have begun to use blockchain to build the Internet of Things, and most companies that try to combine the blockchain and the Internet of Things are still in the proof-of-concept stage. Nevertheless, it is clear that these emerging technologies, if combined, will disrupt various business areas.
Internet of Things: From Hype to Reality
Just like other new technologies have just emerged, hype has helped define the early stages of the Internet of Things. Investment in the Internet of Things has grown rapidly in the past two to three years, but still lags behind initial estimates. According to a study by the International Data Corporation (IDC) in February 2018, it is expected that the spending on the Internet of Things will reach US$1 trillion in 2020, which means a strong four-year compound annual growth rate (CAGR) of approximately 15%. International Data Corporation predicts that the market size will reach 1.29 trillion US dollars by December 2016, but in fact it has not reached the expected number.
This deficiency reflects some problems that exist in reality. Several factors hinder the development of the Internet of Things, including lack of technical standards, outdated commercial and market structures, cultural issues, technical complexity, security and privacy issues. In order to solve some of these problems, companies have turned to blockchain.
The case of the combination of blockchain and the Internet of Things
Our research results show that in the subset of applications related to the Internet of Things, blockchain is a perfect match. Generally, if these blockchain and IoT use cases have one or more of the following characteristics, incremental value can be created:
1. Devices managed across multiple parties require a high degree of trust and transparency
2. When a single record is prone to errors and the cost of losing or damaging data is very high, multiple stakeholders trust a single version of the truth
3. The authenticity of the equipment: this is very important, because counterfeit, fake and inferior equipment will have a huge impact
4. Rely on automated decision-making and decentralized transactions
We have identified more than 35 use cases for companies using blockchain and the Internet of Things, and classified them into five categories: business tracking and visibility, authentication and authentication, automated machine-to-machine interaction, and service-based businesses (such as smart locks, Smart vehicles, delivery, car rental) and data monetization (consumer product data, health data, and environmental conditions (including weather and pollution)). Most of the applications we identified are still in the proof-of-concept stage. Our analysis shows that only about 25% of the use cases we investigated have completed the proof-of-concept phase.
Different applications will have different developments. In two of these categories, participants are expected to have their first promotion in the next 12 to 18 months. The first is business tracking and visibility, 60% of applications are ready for production. The second is authentication and authentication. 33% of applications seem to be ready for production. In the remaining three categories, it may be launched on a large scale in a relatively long period of time.
Our research shows that the automotive and consumer industries are ahead of other industries in the use of blockchain and the Internet of Things. It is followed by medical, technology, telecommunications and industrial products. Nearly one-third of the configurations we determined are applicable to multiple industries. The rest are industry-specific.
The economic value of the combination of blockchain and the Internet of Things
The combination of blockchain and the Internet of Things can bring value to enterprises.
Will bring the following three kinds of value to the enterprise:
lower the cost. Blockchain allows the creation of trusted data sets that can be shared among multiple stakeholders, thereby eliminating middlemen. Eliminating middlemen and automating transactions throughout the value chain will be cost-effective. For example, the automation of the customs clearance process in the supply chain can reduce (and possibly eliminate) the need for customs brokers.
Increase revenue. Existing companies can use blockchain in the Internet of Things to reduce revenue losses (for example, by preventing the sale of counterfeit products). Blockchain can also tap most of the value of the Internet of Things: for example, when using smart contracts, it can automate cross-device transactions and payments. We expect that in service-based businesses and through machine-to-machine interaction and data monetization, significant profit opportunities will be created.
Reduce risk. Over time, due to the progress of globalization and digitalization, compliance requirements will become more and more complex. For example, the 2013 Drug Quality and Security Act (DrugQuality and Security Act) listed the need for the pharmaceutical industry to electronically track the sale of certain prescription drugs in the United States. The combination of blockchain and the Internet of Things can help companies meet this regulatory requirement by collecting and maintaining required audit information. The combination of blockchain and the Internet of Things can also reduce risks by ensuring the quality and authenticity of the product throughout its life cycle, which helps protect the company's reputation.
We predict that the adoption of the Internet of Things and blockchain and the resulting economic value will be carried out in two stages, as will the evolution of other technologies. In the short term, improvements to existing processes will add value by reducing costs and mitigating risks. In the long run, increasing income will provide unlimited possibilities. We anticipate the emergence of new business models and the possibility of a substantial increase in revenue sources.
Challenges for the future
We are still in the early stages of blockchain, and the Internet of Things is only now on track. Although the combination of these two technologies will provide great potential, future challenges may slow the rate of adoption:
The understanding of blockchain is limited. The mechanism of how the Internet of Things brings value to various enterprises has been widely known. However, people have limited understanding of blockchain and how it solves complex business problems. For example, according to a survey by search and recruitment consulting firm MBNSolutions, more than 40% of non-IT, board-level executives in the UK recently admitted that they don't really understand blockchain.
The blockchain has a poor reputation. Enterprises generally accept the Internet of Things. But the blockchain is the basic technology that gives life to Bitcoin and other cryptocurrencies. The reputation of the blockchain is damaged by its association with the first coin issuance ((this is not treated rationally), and people have reason to worry about out-of-control valuation and Potentially dangerous bubbles. Some reports on the blockchain have further undermined people’s trust in the blockchain. The hype surrounding the blockchain may shake people’s skepticism, but it will also affect rational judgment.
Regulatory uncertainty. As governments and regulatory agencies around the world strive to cope with the potential impact of such advanced technologies, any new technology or technology set will bring regulatory uncertainty. Some countries, including China and South Korea, have banned ICOs, but other countries, including Switzerland, have adopted a more lenient stance. As the use of blockchain and the Internet of Things becomes more widespread, there may be more disputes among regulators.
Lack of standards and platforms suitable for enterprises. The industry will eventually establish technical standards that allow rival systems to integrate with each other. But before that, any early adopters of blockchain and IoT solutions must face interoperability and scalability issues if they bind themselves to providers with backward technology. Collaborations like the Trusted IoT Alliance have only recently begun to take shape, with the goal of bringing together the major players in this field.
Cooperation needs. Blockchain derives value from large-scale applications. In most of the use cases we evaluated, support and coordination from multiple parties are critical to gaining benefits. More and more companies are creating and joining specific industry alliances, because the real value in blockchain and IoT projects lies in the willingness of multiple parties to invest time, money and energy as a group. This is why companies need to involve all stakeholders when testing new solutions and invest in what is known as the Minimum Viable Ecosystem (MVE): a way to ensure that the solution is applicable to multiple participants.
Where to start. More than 400 companies provide IoT platforms. We estimate that about 50 of them are ready. Deciding which platforms to bet on and with whom to work with is a major challenge. Companies need to decide which capabilities to build internally, which capabilities to acquire, and under what circumstances, strategic partnerships can help achieve successful transformation from a business and technical perspective.
Everything is a matter of time
In the short term, the combination of blockchain and the Internet of Things will mainly focus on improving the efficiency of the company and further realizing the automation of paper tracking required to meet risk and regulatory requirements. In the long run, as the two technologies mature, the company will use IoT and blockchain to develop and expand new revenue streams. With the emergence of new business models, company development will change.
But the combination of the Internet of Things and blockchain needs time to promote. In particular, before blockchain can fully realize its potential and provide solutions for business leaders, it will take time to refine and overcome some big obstacles-lack of understanding and some technical and regulatory challenges.
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