The hype around Blockchain has created a lot of buzz about applicability and benefits of Blockchain for enterprises. Enterprise blockchain solutions are different from public blockchains on many parameters, one of them being: Who funds enterprise blockchain applications?
It’s concerning that the matter of cost is seldom discussed in blockchain implementation. It is not that the costs are insignificant, but maybe it is not the immediate focus for an innovative technology discussion.
The following are some key discussion points regarding the cost for blockchain solution, which are very similar to any other IT application.
- Hardware and environment cost – development, test, and production environments would be required.
- Licensing of blockchain platform and other components of the solution
- Cost of IT services – requirements analysis, design, development, and testing of the solution
- Cost of integration with existing systems
- Partner onboarding cost
- Cost of being a node – each node needs to have its own storage and compute
A traditional centralized blockchain platform is built and financed by an organization. In contrast, most blockchain applications are conceived as decentralized applications where various stakeholders come together and form a network and no single stakeholder owns the network. In a decentralized and distributed network, it is not as straightforward to apportion costs of setting up and running the network to one or more participants.
Arguably, some of this confusion or lack of interest on cost models originates from the fact that many blockchain discussions are anchored on Bitcoin, Ethereum, or any other public blockchain use case and it is easier to assume that an enterprise application will be similar. But as we know, it is not.
Bitcoin and Ethereum are two major public blockchain networks, both having their own cryptocurrency, millions of users, miners, active developer communities (who also own a lot of these cryptocurrencies), and a start-up ecosystem. All these stakeholders have an interest in the success of these platforms. The initial setup for these platforms is done by a set of developers after which these platforms are made accessible. Ongoing development and maintenance are taken care of by the developer community. Operations are managed by levying fee on cryptocurrency transactions.
Enterprise applications for blockchain are different as they are conceptualized as a network of organizations, where each organization is a node on the network. Due to a lack of precedence of such distributed applications in the enterprise world, it is often not clear who is going to pay for the application, both when it is created and when it goes to production.
The cost model can be driven by how a blockchain network is created. We see blockchain projects getting created in the following constructs:
- Open/Public – like Bitcoin but less likely in enterprise scenarios
Though not ideally suited for organizations, open networks can be funded by building a self-sustaining payment model like Bitcoin and Ethereum which have mining and fees to process each transaction. This way the miners get rewarded and keep the network running. Any changes are conceptualized by developers who contribute to the platform.
- Consortiums - where multiple competing organizations come together and form a group for collaboration.
In this model, the consortium provides for the initial cost of setting up the network. This cost can be apportioned to different stakeholders based on agreed terms, e.g. in the proportion of benefits or transactions done on the network. For example, consortiums like R3 where organizations work together and create solutions and standards for an industry.
- Anchor-driven Network - When one or more organizations take the lead and create a solution
In an anchor-driven model, the anchor organization can pay for the initial cost of getting the blockchain network up and running. These costs can be shared with early members of the network. Once the network grows, additional members can be charged to compensate the anchor member. For example, Walmart’s food tracking blockchain with IBM where Walmart is the anchor.
IT investments beyond the innovation labs are driven by RoI — and blockchain projects are no exception. It is an important topic that should be discussed as soon as you go beyond the “what” and “why” of blockchain. It will help you and your clients to have a realistic ROI expectation from your blockchain solution.