Blockchain Technology:

A Threat of new Competition or a Chance
for Luxury Brands and High-end Businesses?

 

 

Blockchain and crypto-currencies have caused quite a stir over the past years and months. However, it seems their real importance has yet to be fully realized. The future isn’t just in businesses around the globe sporting happy “Now Accepting Bitcoins” signs, but rather emerging companies finding new, revolutionary uses for the cutting edge technology – that will heavily impact also the high-end industries.

 

Background: What is a “Blockchain”?

Blockchain is a disruptive technology because of its ability to digitize, decentralize, secure and incentivize the validation of transactions. The technology relies on research in the early 1990’s and was first implemented with Bitcoin in 2009, but the potential of this technology goes much beyond crypto-currencies and can facilitate transactions of almost anything. Think of blockchain as an operating system, such as Microsoft Windows or MacOS, and Bitcoin as only one of the many applications that can be run on that operating system.

 

Blockchain owes its name to the way it stores transaction data – in blocks that are linked together to form a chain. Each block contains (1) some data, (2) the hash of the block and (3) the hash of the previous block. The data that is stored in a block depends on the type of blockchain. The Bitcoin blockchain, for instance, stores the details about the transaction (sender, receiver, amount of coins, transaction time). A hash is a unique identifier comparable to a fingerprint, which identifies a block and all of its content. Once a block is created, its hash is created. Having the hash of the previous block effectively links the blocks together to a chain and prevents any block from being altered or a block being inserted between two existing blocks. In this way, each subsequent block strengthens the verification of the previous block and hence the entire blockchain. The method renders the blockchain tamper-evident, lending to the key attribute of immutability.

 

Instead of having a central entity, blockchains secure themselves by being distributed in a decentralized network. It is a distributed ledger that is open to anyone (or to anyone with permission in case of permissioned blockchains). Ledgers are nothing new; they’ve been used in double-entry bookkeeping since the 13th century. What is new is the concept of a shared, distributed ledger – an immutable record of all transactions on the network, a record that all network participants can access. With a shared ledger, transactions are recorded only once, eliminating the duplication of effort that’s typical of traditional business networks. When someone joins the network, he gets a full copy of the blockchain. If someone creates a new block, that block is send to everyone on the network. Once information has been recorded inside a blockchain, it cannot be changed: The blocks are strung together into a chain – a fluid chain that does not allow for any inconsistencies; this means there are no “bad cheques” in the system, and transactions entered are necessarily valid and can be processed. A blockchain is updated through peer-to-peer replication, every time a transaction occurs. By checking the blockchain and confirming transactions, the entire system is effectively self-regulated and fully secure. For instance, unlike traditional currencies, which are issued by central banks, Bitcoin has no central monetary authority. No one controls it. Transactions are secure, authenticated, and verifiable – and at the same time cost-effective as there are no intermediaries needed who would charge fees for their services. Blockchain is particularly valuable at increasing the level of trust among network participants. Because every transaction builds on every other transaction, any corruption is readily apparent, and everyone is made aware of it.

 

Smart contracts rely on the blockchain technology. These are simple programs that are stored on the blockchain and can be used to automatically exchange assets based on certain conditions. They may have many contractual clauses that could be made partially or fully self-executing, self-enforcing, or both. Their purpose is to provide security superior to traditional contract law while reducing the costs and delays associated with traditional contracts. For example, a smart contract may define contractual conditions under which corporate bond transfer occurs or it may encapsulate the terms and conditions of travel insurance, which may be executed automatically when, for example, a flight is delayed by more than six hours.

 

Exploring a Blockchain Application

Instead of having a blockchain that relies on the exchange of cryptocurrencies with anonymous users on a public network (as is the case with Bitcoin), a blockchain for business is a private, permissioned network with known identities and without the need for cryptocurrencies. For instance, car companies make leasing a vehicle look easy, but in reality, it can be quite complicated. A significant challenge faced by today’s car leasing networks is that even though the physical supply chain is usually integrated, the supporting systems are often fragmented. Each party within the network maintains its own ledger, which can take days or weeks to synchronize.

 

By using a shared ledger on a blockchain network, every participant can access, monitor, and analyze the state of the vehicle irrespective of where it is within its life cycle. With blockchain, network participants can interact as follows:

  1. The government regulator creates and populates the registration for the new vehicle on the blockchain and transfers the ownership of the vehicle to the manufacturer.
  2. The manufacturer adds the make, model, and vehicle identification number to the vehicle template within the parameters allowed by the smart contract (a digital agreement or set of rules that govern a transaction).
  3. The dealer can see the new stock availability, and ownership of the vehicle can be transferred from the manufacturer to the dealership after a smart contract is executed to validate the sale.
  4. The leasing company can see the dealer’s inventory. Ownership of the vehicle can be transferred from the dealer to the leasing company after a smart contract is executed to validate the transfer.
  5. The lessee can see the cars available for lease and complete any form required to execute the lease agreement.
  6. The leasing process continues between various lessees and the leasing company until the leasing company is ready to retire the vehicle. At this point, ownership of the asset is transferred to the scrap merchant, who, according to another smart contract, has permission to dispose of the vehicle. Based on a blockchain pilot project at Daimler AG, Jan Brecht, Daimler’s CIO, said about this technology: “Now is the right time to get into it, build up knowledge and form a network of like-minded people to share experiences.”[1]

 

Key Business Benefits

Time savings: Transaction times for complex, multi-party interactions are slashed from days to minutes. Transaction settlement is faster, because it doesn’t require verification by a central authority.

Cost savings: A blockchain network reduces expenses in several ways:

  • Less oversight is needed because the network is self-policed by network participants, all of whom are known on the network.
  • Intermediaries are reduced because participants can exchange items of value directly.
  • Duplication of effort is eliminated because all participants have access to the shared ledger.

Tighter security: Blockchain’s security features protect against tampering, fraud, and cybercrime. If a network is permissioned, it enables the creation of a members-only network with proof that members are who they say they are and that goods or assets traded are exactly as represented.

 

The Impact of the Blockchain

The blockchain technology will do for transactions what the Internet did for information. What that means is that it allows increased trust and efficiency in the exchange of almost anything. An asset can be tangible – a house, a car, cash, land – or intangible like intellectual property, such as patents, copyrights, or branding. Transaction volumes will explode with the rise of Internet of Things (IoT) — autonomous objects, such as refrigerators that buy groceries when supplies are running low and cars that deliver themselves to your door, stopping for fuel along the way. Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved. In that way, blockchain can profoundly change how the world works. For consumers, it can revolutionize purchasing real estate (no notary necessary anymore), registering vehicles, or tracking their medical records. Countries could use this technology for their currency, to organize secure online voting, reduce bureaucracy and eliminate fraud in the distribution of public benefits, or for collecting taxes. [2]

 

Opportunities for High-end Brands

Better controlling supply chains: Initial blockchain efforts could have quick impact by transforming even a small portion of the supply chain, such as the information used during importing: If import terminals received data from bills of lading earlier in the process, terminals could plan and execute more efficiently. On a grander scale, blockchains could enable a robust and secure exchange for shared logistics, coordinating a vast array of activities from sharing spare space in a warehouse to optimizing truck fleets and shipping containers. Retailers and manufacturers could greatly improve demand forecasting and stock replenishment. The luxury industry is perpetually stricken with stories of fraud, counterfeiting, certification tampering and black markets. If luxury products were tracked in an immutable blockchain, high-end companies can dry up the massive counterfeit market and push e-commerce even for high-ticket items that are currently not sold online (brands worry, especially in China, that people purchase a luxury product online, but may return a counterfeit). Both, regulators and brands, could trace the origin of goods from raw materials, making it easier to identify counterfeit items, as well as sources of tainted materials (e.g. to check if fair-trade products keep their promises or if diamonds originate from legitimate channels). The blockchain technology can help high-end brands to manage the flow of goods and related payments, and enable manufacturers to share production logs with original equipment manufacturers (OEMs) and regulators to reduce product recalls. In that way, a European high-end brand could prevent its OEM manufacturer in China to covertly and secretly produce any additional lots of its branded items for illegal sale in black channels. It can prevent human mistakes, e.g. sales people selling an item for an incorrect price, and smart contracts could also solve licensing issues.

Methods of Payment: High-end brands may accept crypto-currencies from their customers, which can lower transaction costs (e.g. credit card fees or other fees for international payments).

 

Loyalty Schemes & Post-Purchase: A blockchain-based loyalty rewards program should reduce system management costs with smart contracts that report secure, tracked, transparent transactions to legacy systems, reducing costs associated with errors and fraud. Another double winner for both customers and retailers is the use of blockchain for warranties. The afterlife of goods can be dramatically changed through the existence of a full lifecycle record and supply-chain tracking, now possible thanks to blockchain technology.

 

Threats for High-end Businesses

Blockchain can be both good and bad for businesses by providing the technology that enables businesses to develop new competitive business models. Faced with new competition, some businesses will fail, while others redefine entire industries. Big monopoly-like businesses such as energy or water companies may not be necessary anymore as residents could purchase energy directly from small local producers or other residents. There may be high-end businesses operating in categories that are especially affected and faced with new competition replacing existing businesses in banking, insurance, retail, notaries, etc. When blockchain-based retail utilities connect buyers and sellers without a middleman and associated fees, small and medium-sized high-end brands could sell their products or services directly to end-users without involving big distributors or retailers such as FarFetch or Net-a-porter. By using OpenBazaar, OB1, Slock.it, small hotels could sell their rooms directly to end-users without paying high commissions to platforms such as booking.com. The blockchain can fuel the sharing economy, creating P2P apps for easily sharing cars or any other high-end products, which may has an impact on the demand of these products (e.g. Arcade City). This technology makes it easier and cheaper to invest in luxury assets, e.g. artworks, old-timers and vineyards (tendswiss.com is a platform for luxury investments). Blockchain also changes the entire approach to consulting, i.e. research / analysis and forecasting (e.g. online platforms such as Augur are creating global, decentralized prediction markets). The blockchain could even influence charities, allowing decreasing corruption by tracking donations to ensure the intended party is receiving the funds.