The Right Way to Do Blockchain Consortiums

Randy Wilson is a partner in Digital Risk at Deloitte.

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2019 will be the year the rubber meets the road for blockchain consortia.

If 2017 was a buzzy time that saw a number of successful proofs-of-concept launch, 2018 was a more sedate period when the lawyers got together to develop the framework under which consortia could operate. However, 2019 will be the year that these platforms go live and expand across commodities, processes, markets and geographies.

By now, the benefits of the technology have been demonstrated; the next step is to make this technology work at scale, that is, to build the shared platform that addresses industry challenges, benefits the majority of market participants and convinces the transacting ecosystem to embark on the journey.

The consortium model

The preferred vehicle for launching enterprise-grade blockchain platforms is the consortium.

The idea is simple: If we as a group have enough volume and can drive sufficient liquidity across our platform, the rest of the market will join and transact. Market participants working with their peers have an edge over tech start-ups when it comes to creating a common approach and driving adoption of the platform.

The formation of the Intercontinental Exchange (ICE) provided a replicable example: a leading group of companies and banks came together to create a common derivative platform and the initial investors retained ownership over it.

Now the model is being re-applied across the value chain in the energy sector and beyond. First movers that can bring enough volume onto their blockchain platform will eventually compel the entire market to adopt their technology. The tipping point is estimated to be around 70 percent.

If you can get that share of entities to do business on the platform, the remainder of the market will have no choice but to follow. But time is of the essence: attract only 25-30 percent of the market and you will be stuck serving a fragmented group of clients with little chance of creating attractive positive returns. We have seen many shared industry platforms featuring other technologies suffer this fate.

Near-term growth is still quite challenging even if a platform launches successfully. Large companies have concerns about the enterprise readiness of blockchain technologies and are hesitant to commit live transactions to the platform.

Many want other consortium members to go first so they can identify and remediate significant risks. It is difficult to get a platform going if members adopt such a ‘wait and see’ approach.

Attracting non-members to use the platform can be a challenge. There is usually very high interest at the start of a consortium from parties outside the initial investor group, who also want to get in with some skin. The original investors like the added trade volumes the outsiders bring, but not necessarily seeing their share in the entity diluted. This can result in a serious stalemate. Why would a non-member help a competitor create a platform if they are not adequately compensated for involvement?

The answer is: if they are forced to use the platform because the rest of the industry has adopted it as the place to trade. This must be managed carefully. Failure to do so could encourage outsiders to form a competing consortium. The last thing anyone wants is the emergence of 10 or more rival platforms.

Evolving the model

Two of the most common business models for consortia-led blockchain ventures are as non-profit or for-profit entities. The non-profit approach is most often focused on an industry challenge that has a significant social impact. Such entities often operate as opensource projects and have public or third-sector involvement. The for-profit model is used where development is private sector-driven and where there is the promise of an exceptional medium-term valuation as seen in many supply chain-related ventures.

But another model exists that can encourage broad market participation, and also provide initial investors with a means for creating and recouping value around the platform. The traditional utility model remains relatively unexplored when it comes to blockchain ventures and may hold special promise here – not as the solution, but as part of a hybrid model.

In this model, a consortium first provides basic capabilities – network consensus, transaction distribution and verification, basic smart contract templates, tokenized assets, digital documents, among others – as a kind of utility. Usage fees are established using a cost-based model, and any excess revenue is distributed back to all market participants based on some measure of use, such as volume/value channelled through the platform.

This addresses the issue of founding members having too preferential a position relative to other participants. The consortium can then focus, through a second legal entity, on establishing the second-order benefits unlocked through wider adoption and effective use of the base layer.

Here the opportunity is to create market-specific solutions that harness the core capabilities and further embed the specialist user interfaces, business rules, process flows and data analysis dashboards needed by particular groups of participants. In such a scenario, the core platform could even be opened to rival consortia who would also stand to gain from developing on a common underlying platform.

Wait – did we just invent public blockchain? Well not quite, not yet at least. For some considerable time to come it will remain necessary for consortia groups to maintain a level of control over the operation, accessibility, security and performance of new networks.

The role of data

Energy companies are now cognisant of the value of the data they create. Just as consumers have much greater awareness that the data they provide has value, so too do organizations.

A successful blockchain platform will eventually secure a rich, validated set of transactional data unmatched anywhere else within the industry and it will enable market participants to be firmly in control of when with whom, and how much they share. Those companies will insist that any value received for data originating within their organization and used by some entity in the future flows largely back to the source.

The platform’s role in managing reference data (the countless registers of facilities, ports, vessels, routes, products, deal specifications, procedural documents and even contractual templates) can also provide very real industry value. Many companies would pay a platform provider for access to reference data if they trusted the completeness and reliability of the source.

Recommendations

Several lessons can be learned from the formation of blockchain consortia to date that can be used by other potential adopters, and the most important are around the structure and strategic alignment.

Create a new legal entity structure to deliver your blockchain solution. Separate standalone legal entities allow large industry players to jointly invest in an innovative environment, protects their interests and provides the right level of operational flexibility. The trick is to address the risks involved with investing in a consortium, but not constrain its ability to make decisions effectively.

Structure to maximize adoption, not profit. The goal is to encourage adoption and participation outside of the core members. Models that give too much profit to too few members have struggled and many have failed.

Form an independent board. The board must transition from individual members actively involved in setting up the new entity to those who can focus on the longer-term strategy. It is important to move from a project steering group to an independent board.

The key is to find the right model that adequately protects the interests of the investors, encourages adoption and also promotes the flexibility and innovative spirit essential for a successful start-up. A consortium is a group with a shared goal and it is crucial to be smart about creating a structure that gives the members the best chance of making the right trade-offs.

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