Blockchain: A Practical Approach

(Spanish Version)

Before getting started launching blockchain projects all over the place, first we need to think about whether makes sense to apply a blockchain solution or not; because, same way if we give a child a hammer he’ll feel everything should be hammered, with blockchain technology we’re at risk of thinking everything can be blockchainized. Although in some cases that could be possible, sometimes it makes no sense.

Blockchain technology provides some advantages against classic solutions but it does not guarantee success by itself. It's not easy to compete against business models that are ingrained in our society. To take market share from the big players, new blockchain based business models need to be disruptive as well.

Therefore, it's important to determine where blockchain technology can provide a differential value that meets needs not covered by technological limitations, or that are covered by inefficient models.

Hence, it's essential to have a framework that allows to depict a market and assess the opportunities to apply a solution based on blockchain.

What follows is a description of an analysis framework and its application in a practical case such as the credit market.

A Framework to Get You on the Way

When designing a blockchain based solution it's necessary to understand if it worth it to apply it, to determine how the market works nowadays and to assess different alternatives and, finally, think about the strategies, infer what incentives there are, milestones to be reached and to forecast how current market will evolve towards the new model.

Has your idea any chance of success?

Several factors can help us to assess whether it's a good idea to apply a blockchain solution to a scenario or, on the other hand, it's better to look elsewhere.

We can think about the basic factors as necessary conditions to know whether it makes sense to apply a blockchain solution or not. Lot and dispersed participants among whom there are no trust relationships, need to share valuable assets: currencies, information, digital assets, ... and compliance and immutability guarantees, which ensure that the rules do not change, are conditions that perfectly fit in a blockchain based solution.

But, as technology is not the only factor for success, it's important to determine if the implementation of a blockchain based solution could be a market game changer. In this sense, markets with a high degree of intermediation between the parties, lack of competitiveness (monopolized markets) or manipulated markets (lobbies, institutions, ...) are ideal to provoke a real change of model.

Nothing is free and there are some barriers to overcome to prevent project to fail. These barriers can be at the institutional level, for regulatory and legal issues, at the corporate level, and their organizational models that need to be adapted, and at the customer level from the point of view of adoption.

Delve into the Details to look for Opportunities

As a general rule, first thing is to describe the current market at a high level. In this regard, it's key to represent the interactions map between players.

Where each interaction is described by a "theme" or need to be covered.

The main players (yellow) are those without which there would be no market. For example, in the credit market, there will be those who need money and those who have money and want to provide it in exchange for a compensation. If either of these two players did not exist, there would be no market.

Secondary players are those who have some interaction with one of the main players and tertiary players will be those who don't.

The main interactions (red) are those that relate directly or indirectly to the main players.

Devil is in the Details, You’ll need to Dig Deeper

Interactions details help us to understand why things are the way they are.

Motivations are the main reasons for two participants to interact. Each one seeks to obtain a benefit through the exchange of some valuable asset. The conditions of the exchange will be reflected in an agreement that will bind each of the parties. Around this interaction and the agreements reached there may be external factors (environment): regulatory, legal, market situation, interest rates, ... that may condition or influence such agreements.

When describing an interaction it is important to describe its main story, the dynamics of that interaction, how it begins, how it develops and how it ends.

Get Your Compass and Explore the Possibilities

From the interactions map and details, it's possible to identify decentralization opportunities. You can do it for all interactions (desirable) or only for those you presumably want to decentralize.

This study is based on determining how decentralization can simplify an interaction by removing one of the players and replacing its function with a smart contract.

The Initial Criteria describe the conditions that must be met in order to create/start the smart contract. Conditions that must be met by players and other necessary inputs.

An important matter is that removing a player probably implies another player to participate in the smart contract. This is one of the consequences of disintermediation.

Throughout the life of the smart contract, until its extinction, there may be input and output information.

The actions describe the functionality of the smart contract, the ones that are performed when the smart contract is created, those that are executed periodically and those that are carried out when the smart contract ends.

The end criteria are those that determine the completion of the smart contract.

After analyzing all the interactions, we will have a series of potential smart contracts with input connectors that we can assemble as a puzzle, or we can group all the interactions in a macro smart contract with all the functionality.

The Funny Part, How do You Want to Play in the Game?

After all this analysis we can identify what possible decentralization strategies we can address.

Our strategy will be aggressive if we attack an intermediary that interacts with the main players or conservative if we seek to eliminate secondary and tertiary players.

We do not contemplate a third strategy, a suicide one, which would consist in trying to decentralize absolutely everything. Although in the future the entire market may become decentralized, on the road it will be essential to rely on partners of the classic model, so it will be necessary to leave their space for them to participate.

To determine our strategy, we must identify what "Issues" we want to solve and the value that the new model seeks. For example:

From the analysis of decentralization of interactions, we can complete our strategy.

The strategic vision and the value proposition determine what we are looking for with the new model.

The map will represent the market once the decentralization strategy has been applied.

The main story describes how we expect the new model to behave.

The environment will summarize the set of factors that can influence this smart contract.

The initial criteria will be consolidated from the interactions analysis. Simplifications can be given.

The inputs and outputs will be consolidated from the interaction analysis. Simplifications can be given.

The actions and finalization criteria will be consolidated from the interactions analysis. Simplifications can be given.

How does Our Strategy Work within the Market?

Why will Players be Willing to Change?

If you change the music, make sure everyone is willing to dance.

This is about exploring what are the motivations that can lead a current player to evolve and participate in the new model.

Factors such as opening new markets, getting more revenues, to be more efficient or simply not losing competitiveness, or even not falling behind, might be more than enough to embrace change.

In many cases, it will be difficult to make tangible the benefits of the change in the short term. In most cases, companies will not be willing to assume any risk until the maturity of the new model is confirmed. Therefore, it is important to identify if there are disruptive elements with respect to the current model that can "force" players to enter.

Another strategy is to look for hybrid use cases in which current players can take advantage of the new technology without losing its essence.

Which are the Milestones toward Success?

You must have some references to verify you're moving.

Every new model has to achieve a set of milestones to verify that it has been successfully implemented.

Making an inventory of milestones to be achieved is the only way to be able to measure whether the implementation of the model meets expectations.

Market Evolution toward New Market Model

Nothing changes overnight and miracles do not exist.

Understanding the differences between the current and future market, it is about inferring what evolution strategies can be followed.

Follow a logic if-this-then-that. The use of decision trees assigning probabilities allows us to infer which option is more likely to succeed.

This exercise will allow you to draw up your action plan, to identify who your partners should be and the list of initiatives and projects to be carried out.

Use Case Applied: Credit Market

Without going into the smallest detail, we will apply the analysis framework so that at the end we'll have a good idea of what could be done in this market in general and how the framework works in particular.

Genesis: Does it make sense to introduce a blockchain solution in the credit market?

According to the basic criteria, there are several circumstances: numerous and scattered participants, especially if we consider international loans; need to share valuable assets, money; and compliance guarantees are required.

In this market, applying a blockchain based solution can be a game changer because of the high level of intermediation, it is a very competitive market but it is also true that it’s not totally open. There are large players at the local level (in each country) and the market is controlled by large companies, not giving the possibility that individuals can act as credit agents. A blockchain based solution opens the market to the entry of individuals and external companies not located in the same country.

The implementation of a credit model has to face several barriers such as regulatory, in each country there is a regulation that will need to be met, legal regulation and issues related to the adoption of the new model. Nowadays is culturally rooted a personalistic credit model. Evolving towards an anonymous model  governed by objective criteria is a shock for both, the one who requests the loan and for the one who grants it.

We can conclude that makes sense to apply a blockchain based solution though there are some bulls to ride.

Merkle of Interactions: How everything is working and How do we want to play the game?

An Overview about how the Market Works allow us to Learn About the Terrain

Thinking of the American credit market, in broad terms we have the following players: customers, lenders, savers, credit history agencies, collection companies and law firms.

A company can represent one or more of these roles. For example, a bank can be both "Saver" (in the sense that it owns money), Lender and even have its own Collections department.

The Customer and the Saver are the main players, without them, the credit market would not exist. Customers that need money and people / companies that have it and want to lend it in exchange for a compensation. The lenders themselves are intermediaries that make possible (or not) the credit market to develop.

Deepening in the Interactions we Realize Nuances

For brevity, we’ll focus the analysis on two interactions. It should be enough to understand how the framework works.

We’ll go into two main interactions details:

Customer-Lender interaction, it is due to the customer need to obtain a loan and the lender objective to obtain a profit for it. Both will reach an agreement as long as the needs of each one are satisfied, for the customer,  total amount, term and monthly payment with interest; on the part of the borrower, it will require customer credit history and / or any other guarantee of payment.

Agreement conditions will be affected by the market interest rate, the situation of the economy and the existence or not of competitors.

A customer looking for a loan ask to several financial entities in order to get it. Entities will ask him for credit history and will offer loans conditions according to his profile. The customer will choose the lender that offers better conditions.

Although the customer is the one who finally chooses the best offer, the lender is the strongest player of the interaction since he can unilaterally reject a customer if he does not consider him adequate or does not comply with his conditions.

In times of economic uncertainty, lenders risk aversion increase, the conditions harden and many customers stop being attractive to the lenders. This situation leads to a decrease in the credit flow that undermines economic growth.

We can represent this interaction in the following way:

We follow the same procedure with the Lender-Saver interaction:

How will interactions evolve by applying decentralization?

From the interactions map and the detail of the two analyzed interactions, we can explore how to create a smart contract that eliminates some of the players.

In particular, we need to figure out which features we need to include in the smart contract in order to achieve that disintermediation.

For customer-lender interaction, we have seen that the main player is the customer, without which there would be no market, while the lender is the expendable part even though today is the powerful part of the relationship.

Lender is replaced by the saver, to whom the money really belongs to.

To formalize the smart contract to take place, it's necessary for the customer to prove credit history. After this process, the customer and the saver will agree on the amount to be lent, the interest rate, quotes to be paid, payment method and origin and destination accounts.

Throughout the smart contract life, there are inputs that can influence it, such as the market interest rate or any other exceptional action foreseen in the smart contract, such as a request to cancel the contract.

The smart contract will generate outputs that report about the execution, such as the payments that are made, when it ends or possible breaches: non-payment, delays, ...

Actions and completion criteria will reflect how this contract behaves, for example:

At the beginning of the agreement, to transfer the agreed amount to the person requesting the credit. At each monthly expiration to calculate the fee to be paid and subtract the amount from the account (address) of the borrower and send it to the address of the lender.

In case the account doesn't have funds, issue a notification to the lender and the borrower. The contract will reissue the transfer attempt periodically while waiting for the borrower to have provisioned the funds.

In case the customer doesn't make the payment, the credit agencies are notified.

In case the customer goes into default, three months without paying, it will be reported to a collection entity. This entity can raise the money in other ways and can issue a payment later to the blockchain.

If the recovery initiatives do not prosper, the legal department will be notified.

We can represent it in the following way:

We apply the same procedure to the lender-saver interaction.

Since in this case we are also eliminating the same lender, there will be many similarities with the previous analysis.

A relevant aspect to understand this interaction is that the relationship is no longer one to one. That is, several savers deposits can contribute to a credit for a single customer.

On the other hand, the role of the saver evolves and there will be two types, the classic saver that does not want to put their money at risk and seeks to improve their profitability a little; and the saver who is willing to participate in the granting of credits to get more profitability. Depending on the level of risk the saver is willing to assume, he will be one or the other.

How do we Wantto Play in the Market?

Taking into account that we have focused our analysis on the two main interactions, our goal is: To facilitate the relationship between the main players.

Once we eliminate the intermediary lender our interactions map looks as follows:

And our strategy will be:

How will our Strategy behave within the Market?

What Reasons can the Players have to Change?

There is a basic principle: If the customer moves, you move.

Customers will determine the evolution of the market, and companies, like it or not, will have to evolve because their reason for being in the market is to procure benefits. In one way or another, they will be dragged into that movement at the risk of being left out.

The question then becomes: what reasons can customers have to participate in the new model?

By participating in the new model, the probability of obtaining a credit is multiplied.

The entry of local savers, who previously had no possibility of participating, and international lenders generate new flows of internal and external credit.

The customer has the possibility to opt for a more varied credit offer, unlike the market to which he is used to: local scope, little-varied offer, inflexible conditions and conditioned by institutions that are governed by local market situations: crisis, uncertainty, etc.

When the customer starts using the decentralized credit marketplace, the local financial institutions, which are used to wait for the arrival of customers, will see their business decreased and they will have to react.

The reaction can happen in a double sense, making their conditions more flexible and / or participating in this decentralized market.

Credit agencies will be dragged in turn because, in order to generate a reliable credit history, they need all the credit information of the customers. As soon as customers participate in the credit marketplace, credit agencies will need to collaborate to obtain that credit history.

Collection companies and lawyers' buffet will have direct access to a new market, gaining independence with respect to the large local lenders who, until now, completely control the portfolios of defaulters to market.

Therefore, once the client moves all the players will have reasons to move.

What Challenges do We need to Achieve to Achieve Success?

Essentially, it is necessary to create the marketplace, to ally with partners in the markets in which we want to operate and, most importantly, to attract customers.

Have a partner vision as extensive as possible. Partners can be credit agencies, collection companies, law firms and even financial entities that make loans. The road to success often gives us unsuspected travel mates.

It's not a problem a credit institution participates in the model. Rather it is the contrary, it benefits the model since its participation gives it legitimacy.

The extensive vision of the partner also refers to temporality. It is necessary to know what type of partner is optimal in the beginning and what kind of partner is appropriate when the model is mature.

In order to attract customers, it is necessary to have a good commercial strategy and excellent online marketing capabilities, since this is where the majority of customers will be found.

How do we Expect the Market to Evolve Towards the New Model?

The question to be answered is: how do we go from a model based on local credit markets to a global credit marketplace?

We can propose a strategic positioning to subsequently grow or directly start the first world war of credit opening a multitude of fronts in many markets, which is very risky, expensive and not recommended.

The strategic positioning should start with 1 or 2 geographies, for example, America and Asia, and choose a mature credit market in which all the players exist.

It's not recommendable to start with a developing country where everything has to be done and most likely there is no habit of applying for credits. This type of market probably lacks the necessary partners to start the model.

It's key to choose a market with a flexible regulation and to assess how the model fits within.

Finally, it is necessary to create a network of local partners: credit history agencies, law firms and credit entities.

Again, the credit entities are the player to be eliminated but they are not a problem if they adapt to the new model. In fact, they are essential in the beginning as far as they can provide the volume of credit that makes the marketplace attractive to customers.

It will be difficult to associate with a leading credit institution in the market. It is more feasible to have medium-sized entities support, with less commercial capacity, and for whom the marketplace is a new channel to generate profits while generating efficiencies by using the services that marketplace partners provide.

The marketplace will grow along the time with the entry of new credit institutions and the participation of individuals and other companies in the credit provisioning.

Once the local marketplaces acquire maturity, they can be interconnected, automatically facilitating the flow of credit at an international level.

The new model can lead to new dynamics that currently do not exist, such as the creation of credit cooperatives owned by savers, international cash flows based on economic cycles and sustainable growth over time.

The benefits of the new model will lead other countries to follow the same path and it is foreseeable that there will be a relaxation of the regulatory conditions to facilitate the implementation.

As the new model expands, large credit institutions will be more willing to enter since, also for them, the possibility of commercializing credits in countries where they have no presence is very attractive.

In summary, we have the following analysis:

Conclusion

Nowadays no one knows for sure what the future will be like. Do not discard anything, do not fear anything, experiment and reimplement as many times as necessary. Shyness and fear have no reward. To explore does. Because the blockchain model proposal is going to change the market structures towards more lax models that will create greater fluidity and more opportunities.

Models in which the democratization of the activity blurs the concept of provider and customer. The customer will become a provider and the provider will become a customer.

Big companies will evolve from a model based on an international presence with local management to a new model that allows them to exploit their potential globally, relying on a network of partners. Because strategic partnering and alliances will be the lever that differentiates the winners from the losers.

This mentality shift will be reflected in the ease of adopting new models and, above all, to not over depend on them. New models will emerge as a result of the evolution of the previous ones and the customers adoption.

Different models will have a place in the same market and, in many cases, success will depend more on execution than on theoretical perfection.

This is not an easy endeavor, and group-thinking will not take you much farther from where you already are. It's key to get on board people who know your reality and new talent that contributes to creating a new, fresher vision. Technological knowledge will not be enough. Abstract thinking, creativity, and analytical skills are assets that you must count on from the very beginning.

The means and the fears are there. You choose.

Blockchain: A Simple Approach