Harnessing the Blockchain: Build or Buy

One of the key technological revolutions of the last two decades has been the rise of software as a service (SaaS) and platform as a service (PaaS). In the past, companies would install on-premise software and hardware, managing and maintaining their infrastructure internally while dealing with the imposed costs and challenges.

SaaS changed all that. Businesses can now outsource their hardware and software requirements to cloud providers who do all the maintenance and management for a simple fee. Infrastructure is scaled up and down depending on needs, which means that companies can shift their tech needs from capital expenditure (CapEx) to operational expenditure (OpEx). Simply put, tech isn’t the core business of most organizations, so it makes sense to outsource it to organizations with technology as their core competency.

What does this have to do with blockchain? The same choices businesses faced when deciding to move to SaaS and PaaS (and the cloud) are now presenting themselves to companies wanting to embrace blockchain technology. They’re faced with deciding whether to build their solution on the public blockchain, create a private solution fitting their own needs, or to outsource it to another company specializing in providing blockchain as a service (BaaS).

The question for most enterprise-level tech leaders is, should your organization ‘buy or build’ a blockchain solution? What factors - including talent, time to market, and how to gain internal traction - should you consider? Let’s consider.

Nailing the basics

A blockchain is a decentralized ledger that makes it possible to register, confirm and transfer all manner of contracts and property. That’s why it initially gained traction in the financial services space. The Australian Securities Exchange, for example, was an early adopter of blockchain to verify transactions carried out on its trading boards.

The central technical innovation associated with blockchain is distributed ledger technology (DLT), defined as “the use of decentralized digital trust verification through encrypted digital signatures.” [1]

There are several key advantages of blockchain for business, including high fault tolerance, a single view of events; transparent verifiability; and data ownership without a central authority.

Where to focus

Organizations wanting to use blockchain as part of their business have a choice – they can either buy, borrow or build. However, it’s vital that an enterprise focuses on an option that’s not disrupting for the sake of disruption. Instead, blockchain implementation needs to be a real value-add to existing business processes.

Although blockchain promises new business opportunities, at the earliest stage of a decision, it’s critical to start small and iterate often. It’s also important to introduce a blockchain program in areas offering the least risk in terms of both change management and the day-to-day running of the business.

So how should you choose when it comes to deciding whether to buy or build your company’s blockchain solution? In essence, it comes down to operational focus.

If your blockchain efforts are aimed at purely providing better solutions for internal processes, it may make more sense to build an implementation in-house. Larger organizations, such as Facebook, have taken the route of buying-in talent through acquisition. Facebook, in this instance, undertook an acqui-hire of Chainspace, a move that brought its blockchain efforts up to speed without the need to build an internal team from scratch.

Most companies won’t have Facebook’s resources to buy a company just for the sake of decreasing their time to market. This is where an internal project, starting small, can make all the difference.

In-house implementation

Building a blockchain solution internally lets a business control all the moving parts and separates the noise from the project’s actual value. It also builds people and technical skills capability, which will pay dividends in the long term. Building internally also allows you to scale quickly (assuming you can find the right talent) and focus on the business areas where a blockchain program can make a real difference.

Naturally, building internally will be taxing on your resources. Your team must have the skills, time, and operational infrastructure to support your blockchain efforts. And those skills are in high demand and don’t come cheap. According to global recruitment firm, Randstad, in a market like Singapore an experienced blockchain engineer can cost upwards of SGD 15,000 monthly.

Doing the job yourself means that it’s easy to underestimate the amount of time it will take and overestimate the pay-off at the end of the project.

And just because you are building internally doesn’t necessarily reduce your reliance on external vendors. The project will still require suppliers who can take care of your storage needs, network, encryption, user experience, and smart contract development. All this requires a budget, which will naturally need to be factored in from the beginning of the project.

Whether or not there is an advantage to doing the project internally depends on the number of partially or fully decentralized apps (dApps) share the underlying technological infrastructure you have built.

Outsourcing the project - BaaS

As we have seen with the rise of SaaS over the last two decades, many organizations don’t have – nor want – the internal capability to invest in, deploy, maintain, and manage technology infrastructure. This is where ‘Blockchain as a Service’ (BaaS) comes into play.

Prominent players, including IBM, have already developed BaaS, and it’s available here today on the same terms as how other SaaS offerings are made. A company contracts with a service provider, their needs can scale up or down depending on requirements, and it’s available for a simple fee – no infrastructure or maintenance required.

IBM’s service has historically been built on the open-source, community-based Hyperledger Fabric Platform, which was developed by the Linux Foundation. It has support for on-prem infrastructures and third-party clouds, and is built using an open-source codebase.

Why use BaaS instead of building in-house? It depends on your requirements. BaaS providers can help with legal requirements – important if your organization is operating in a highly regulated environment, such as the financial services sector.

According to McKinsey[2], it’s critical for companies to tailor their strategic approaches to blockchain regarding their market position. This means organizations that don’t want to build, can hire the services needed to get their blockchain efforts up to speed while meeting regulatory requirements

BaaS also has advantages over a public blockchain because they are seen as ‘permissioned’ networks. These permissioned networks, hosted on private computing networks, have controlled access and editing and management rights, compared to a public chain where authority is entirely decentralized, and the needs for corporate control can’t be met.

Other advantages of BaaS include reducing the cost of experimentation. With BaaS, a company can easily roll out a blockchain program, measure its effectiveness, and then iterate based on the results of the experiment. These sorts of trials aren’t as easily achieved using an in-house solution.

Further advantages include being able to gauge the market fit of any project and the ability to ‘sell’ the project to management. That is, a project that can easily be tweaked or even terminated will gain more traction with board members than deploying infrastructure and personnel on an internal project, with variable results.

Finally, the time to market a project built using BaaS is going to be significantly faster than infrastructure built internally. With the blockchain ecosystem moving so fast, it may make sense to buy rather than build so that the organization can quickly pivot to take advantage of changing market forces.

In summary, if your organization has smart contracts it wants to deploy, or it wants to build dApps on the blockchain, then BaaS makes sense as the service provider has done all the infrastructure work for you - all you need to do is execute on your plan.

On public blockchains and why they are the future

According to a report from Forrester and Ernst & Young, while many companies are building private blockchains, 75 percent of those private users believe the best path to the future is on a public network.

Where private blockchains have their advantages is if they are only being used for internal and partner use. Developing in-house may make more sense in this instance, as it can be kept entirely private, it is controlled by the organization and doesn’t need to scale. It’s also a customizable solution, meaning the organization can build something specifically for their own purposes.

Public blockchains are scalable and secure once they reach a critical mass. Proof of Stake blockchains are also more affordable than their Proof of Work rivals in terms of the gas (transaction) fees charged for a transaction on the network.

It’s often more cost-effective to deploy smart contracts and conduct transactions on a public blockchain. The costs of running a private network could exceed the value of the work being done on it, while the service fees for BaaS could, similarly, be higher than simply paying gas fees for a transaction on a public network.

Building on the public blockchain also means network maintenance is carried out by a broad range of participants, unlike a private chain where networks must be maintained by the central authority. Network upgrades are also developed and deployed without any additional capital requirements from an enterprise user. In addition, a public blockchain, with enough adoption, also means there is competition among developers to improve new and existing applications and solutions. This means the relevance of the blockchain is maintained in a fast-moving tech landscape.

This is because the network is upgraded based on community and developer consensus. Upgrades do not need to rely on an enterprise’s own capacity to advance the blockchain functionality. Depending on the blockchain’s core technological design and strength of its developer network and community of users, it can adapt and upgrade as and when required.

Finally, a public blockchain means there is interactivity between different projects on the same chain. Multiple projects by different organizations can ‘interact’ within the same ecosystem, allowing them to use different enterprise services rather than being limited to their own. For example, if a business is building a product or platform as part of a new business model or revenue stream, then it makes sense to build on a network with the broadest community participation. This creates tools that this large pool of users would find helpful and would want to use.

For enterprise, open blockchain networks are the future. Just as we currently use open source software to run our organizations, and the open internet to communicate, open blockchains will enable new ways of doing business and even new ways of structuring businesses.

Key Takeaways:

Internal projects make sense only in limited circumstances, including the need for control and the desire to build blockchain capability within the organization.

Building internally can be expensive; people with blockchain experience are hard to find and command high salaries.

Gaining traction for the project from management is easier using a BaaS solution as it allows experimentation and the project to scale as needs dictate.

Time to market is faster using BaaS, and companies can benefit from experienced partners.

Open blockchains are the future of business and are the springboard to the Web3 future so many are building towards.

[1] https://link.springer.com/article/10.1007/s12525-019-00386-3 [2] https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/blockchain-