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Does your Startup Really need Blockchain?

‘To Blockchain or not to Blockchain’ – this is one big question that has been on the minds of startup founders in recent times. From supply chain monitoring to equity management and cross-border payments, Blockchain has been making its way into multiple areas.

Startups, to meet their growth goals, are jumping onto the Blockchain bandwagon to generate buzz, convince investors, and raise new rounds of funding.

Many startup founders approached us with a common question in the recent past- Is Blockchain the right fit for my startup? That triggered me to help them with a decision tree that will enable pragmatic decision-making in this direction. However, the number of startup founders reaching out to us with this dilemma kept increasing of late, which inspired me to write a detailed article on this.  

Whether to adopt Blockchain for your startup is not merely a technological decision but also a business decision. Being the frontliners of decision-making, it is crucial for founders to not fall for the hype but diligently analyze if adopting Blockchain is right from the business perspective– even in cases where a well-defined problem exists.

While Blockchain’s unique properties have forced startup founders to think of it as essential and transformative technology, the ‘business benefit’ stands firm as a vital consideration in this decision. This article will cover both technology and business perspectives that founders need to consider while evaluating Blockchain.

Decision Tree: Evaluating the Technology Fit

Though many research papers feature decision trees to evaluate Blockchain use case feasibility with respect to technology, here is a simplified version of the framework-

Real-Life Use Cases

For a better understanding of the decision tree, let me take you through some of the real-life use cases across different verticals- 

Use CaseDo we need to store the states?(user specific data and/or meta data)Are multiple users involved/ updating the stored states? Is any trusted third part involved? Can the third party be eliminated?Decision Remarks
Social media application that involves user engagement and interactionYesYesYesYesNoThis can be developed as a traditional centrally-managed application. However, one can consider Blockchain if and only if the control has to be released to the community
Food retailers receiving supplies from producers, wherein ensuring food quality is a key challengeYesYesNoNoYes 
Organizations maintaining records of employee attendanceYesYesYesYesNoAs long as there is mutual trust between organization and employees, there is no necessity of Blockchain. If any trusted third party is involved and Blockchain comes to picture, it would be mere over-engineering


Cost-Benefit Analysis: Evaluating the Business Fit

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Every startup founder, who is planning to invest in Blockchain, should assess the ROI that will come from its implementation. You might be adopting Blockchain as a necessity or a differentiator for your product, but evaluation should always be done from a revenue generation perspective.

You might have to come up with cost-benefit analysis as per your business, but I will help you with an example to better understand the approach. Let’s consider the case of food retailers mentioned above, wherein we would compare the high-level costs with different cost components.

Development Cost

If development efforts for building an MVP with traditional centralized system approach were around X man-months, the efforts would be 30-40% higher in case of a Blockchain-based approach, primarily for building Blockchain-based eco-system components. Usually, a Blockchain developer would cost you at least 1.5 times more than developers working on widely used technologies. This would make the development cost of Blockchain 2X higher than the tradition application development cost.

Infrastructure Cost

To evaluate the infrastructure cost, let’s assume the transaction volume of a few hundred transactions per second (TPS). If for a traditional solution the infrastructure cost is about X per year, it would be the same for a Blockchain-based approach. This is as per an assumption that nearly 8-10 nodes are part of the consortium. It boils down to one inference- Instead of a single party managing all the infrastructure nodes, every member of the consortium should own the node.

With the increasing transaction volume, the traditional approach can scale horizontally; however Blockchain-based solutions face the ‘Scalability Trilemma’. This is a famous term coined by Vitalin Buterin that, in layman terms, is akin to the phrase ‘you can’t have everything’. Businesses should clearly understand which aspect among the three- decentralization, security, and scalability- they intend to optimize and if that is in line with their value proposition.

Other Costs

A few other business efforts required in case of Blockchain-based solution include setting up the consortium, convincing the plausible members regarding benefits of joining the consortium, and expanding it to a level where it can be claimed as safe. Besides, it might also include devising legal rules and regulations to resolve conflicts.

When talking about benefits, a Blockchain-based approach can certainly enable business processes automation using smart contracts. The approach not only improves the overall process efficiency but also reduces operational costs for the businesses. This report [2] says that using Blockchain can minimize wastage of goods, which can result in savings of nearly 450K Euros annually.

This value far exceeds the initial investment and operational cost that goes into a Blockchain-based solution. When the consortium further grows, the Blockchain-based automation protocols would enable business communities to define industry-wide standards.

Summary

Though it might not have garnered the importance that it deserves, evaluating the feasibility of Blockchain is highly recommended for startup founders. This article aims at busting the Blockchain hype and encouraging in-depth evaluation from an intersection of business and technology perspectives.