In a 2019 report by McKinsey, the authors characterized the status of blockchain innovation as “a transition point between Blockchain 1.0 and Blockchain 2.0. In the new era, blockchain-enabled cryptocurrency applications will likely cede their prominence to blockchain business applications that can potentially increase efficiency and reduce costs. These applications will be in a good position to gain steam since many large tech companies may soon begin offering blockchain as a service (BaaS). Rather than just providing the hardware layer, as they’ve traditionally done, these companies will extend their services up the technology stack to blockchain platforms and tools. As blockchain deployment becomes less complex and expensive, companies that have sat on the sidelines may now be willing to take the plunge.” (1)

The semiconductor sub-vertical of the technology industry has largely been on the sidelines during the early phase of blockchain innovation, but the technology has always been of interest to the industry because of the potential for increased chip revenue based on bitcoin, crypto, and blockchain deployments.   Inspired by some of the insights from the McKinsey report (which was specifically about the potential of blockchain business applications for semiconductor suppliers), the following is a compilation of blockchain business applications that may create new value propositions and operational efficiencies for the semiconductor manufacturing supply chain.

A Sidebar from McKinsey:  What advantages do blockchain business applications offer?

For the blockchain uninitiated amongst our readership.  Or for the crypto fanatic who has mainly considered the value proposition of blockchain from a bitcoin and crypto perspective, McKinsey provided this very clear explanation of the potential of blockchain business applications:

Think of blockchain as a database shared across a number of participants, each with a computer. At any moment, each member of the blockchain holds an identical copy of the blockchain database, giving all participants access to the same information. All blockchains share three characteristics:

• A cryptographically secure database. When data are read or written, users must provide the correct cryptographic keys—one public (basically the address) and one private. Users cannot update the blockchain unless they have the correct keys.
• A digital log of transactions. Transactional information is available in real-time through the blockchain network. Companies doing business with each other must thus store most of their transactional information in digital form to take advantage of blockchain.
• A public or private network that enables sharing. Anyone can join or leave a public network without express permission. Admission into private networks is by invitation only.

Blockchain’s cryptographic keys provide leading-edge security that goes far beyond that found in a standard distributed ledger. The technology also eliminates the possibility that a single point of failure will emerge since the blockchain database is distributed and decentralized. If one node fails, the information will still be available elsewhere. Another advantage involves the audit trail. Users can go back through the blocks of information and easily see the information previously recorded in the database, such as the previous owner of a piece of property. And perhaps most important, blockchain maintains process integrity. The database can only be updated when two things happen. First, a user must provide the correct public and private keys. Second, a majority of participants in the network must verify those credentials. This reduces the risk that a malicious user will gain illicit access to the network and make unauthorized updates. (2)

Blockchain as a Service (BaaS) will have the same impact on innovation as Amazon Web Services (AWS)

One of the most sophisticated insights of the McKinsey report is their take on the opportunity BaaS represents for the semiconductor industry to go “up the stack”  – and not preordain that their only value proposition designs and business model transformations are at the hardware level:

“Much interest in blockchain business applications stems from the recent advent of BaaS, which simplifies the creation of the complex, five-layer blockchain technology stack (Exhibit 3). Until the past year, enterprise customers had to build individual layers themselves or cobble them together from disparate sources. Among other tasks, they had to customize existing digital-ledger fabric platforms (distributed computing platforms with a base protocol and configurable functions). They also had to acquire and integrate data, define permissions and governance protocols, and code software. Most enterprises simply lacked the funds or in-house technology talent to make this happen.

With the emergence of BaaS, the onus of deployment has moved from customers to providers. While BaaS is typically limited to the infrastructure layer, some providers also create tools that extend into the data and digital-ledger layers. With access to these offerings, customers can significantly reduce the deployment costs of a new blockchain system. For instance, they will no longer have to invest heavily in data or in ledger software and services to make their fabric platforms operational.

Within the current BaaS technology stack, value predominantly lies within the lowest layer: hardware. But over the next several years, as blockchain business applications start to gain a foothold within large industries, demand will increase for hardware customized for specific use cases or micro-verticals. This development will cause the value to migrate up the technology stack from hardware to other layers.

Given these trends, semiconductor companies should consider enabling or providing the entire BaaS technology stack for specific micro-verticals or use cases. After developing a clear understanding of how customers plan to use their blockchain chips, semiconductor companies could then provide platforms and plug-ins that help integrate the layers of the blockchain technology stack, allowing for easier implementation. A combined offering would meet all customer needs for blockchain, just as TensorFlow does for machine learning and deep learning.

This strategy will become even more important as the use cases and micro-verticals start to mature since the hardware will become a commodity. Those semiconductor providers that don’t move “up the stack” will have an increasingly difficult time capturing value and thriving. In fact, they could find themselves in the same situation they face in the data-center market, where “hyper-scalers” have a great deal of control because of their purchasing power.

If the new players can differentiate themselves based on product performance or price, they may dethrone the current market leaders. Companies with strong end-to-end BaaS offerings may lead the pack, while those that continue to focus on hardware alone may find themselves sidelined.

If blockchain were a tool, it would be a Swiss Army knife that has a blade, a screwdriver, a can opener, and many other attachments—a clever technology that enables a diverse set of use cases that go far beyond cryptocurrency. But like a Swiss Army knife, blockchain can be unexpectedly complicated. Industrial companies must know what networks and transactions are most likely to benefit their business. They must also understand which use cases have features that are most likely to deliver value at scale—for instance, characteristics that encourage other participants to join the blockchain and collaborate. Likewise, semiconductor players must understand how blockchain is being applied, within both the cryptocurrency market and the business sphere, and closely follow market developments in both areas. With blockchain evolving so rapidly, it can be difficult to keep pace with change. But those semiconductor companies and industrials that pursue innovation while aggressively enabling blockchain use cases are likely to reap the greatest rewards.” (1)

Blockchain Business Applications – Use Cases for the Semiconductor Industry

According to the Manufacturing Leadership Council (of The National Association of Manufacturers) “blockchain technology is set to empower the semiconductor industry to expand its business horizons.  According to Reportlinker research, the semiconductor silicon wafer market stood at $9.85 billion in 2019 and will reach $13.64 billion by 2025, with a CAGR of 6.18% between 2020 to 2025.  Such growth rates accentuate the need for semiconductor companies to integrate business processes with the blockchain to enhance security, transparency, and encryption.  While blockchain technology is still in the early stages of development, it is now poised to aid semiconductor manufacturers in decreasing costs & counterfeits and enhancing visibility into the value chain. (3)

The following use cases are a compilation from the following articles:  Blockchain Opportunities in the Semiconductor and Electronics Manufacturing Supply Chain from Semi, Blockchain in the Semiconductor Industry: 5 Innovative Use Cases from the Manufacturing Leadership Council, and Blockchain Attempts To Secure The Supply Chain from an industry rag Semiconductor Engineering, which was founded by industry practitioners.

Use Case:  Blockchain for Business Process Transformation

Use Case:  Blockchain for Decreasing Counterfeit Chips and Material Identification

In the distribution stage, customers could search the ledger for a product’s complete history, reducing counterfeiting and solidifying the origin of properly sourced goods. When a faulty product is identified, the manufacturer may search the ledger to quickly locate the faulty supplier or bad test results and alert all receivers of the defective product. (5)

Use Case:  Blockchain for Supply Chain Visibility

Suppliers may also combine blockchain with IoT sensors on shipping containers to provide a tamper-resistant record of shipping conditions. This could be used to ensure that temperature and humidity tolerances for chemicals and equipment are not exceeded during transit from the supplier.

The identity and materials in components and subcomponents of manufacturing equipment could be collected on a blockchain to verify compliance with environmental and health regulations. (5)

SEMI also describes how blockchain can help clear data sharing bottlenecks:  “Blockchain functions could help alleviate many data sharing pain points in manufacturing. Blockchain’s distributed functionality, bundled security measures, and associated features such as smart contracts have the potential to help manufacturers quickly trace goods, manage records transparently, and automate supply chain processes and payments. No isolated blockchain platform would solve all of these problems on its own. But, when combined with other solutions and applied to particular use cases, blockchain has the potential to optimize operations and foster an environment of trust and collaboration among consortium members.” (5)

What Next?  The Emergence of the Blockchain Value Network

Based on exhaustive M&A research with Deloitte completed in the 2015-2016 timeframe, a key finding at the time was the role of platforms and ecosystems in the commercialization of artificial intelligence at scale by the technology sector – this advice from McKinsey rings true: ” The strategic value of blockchain will only be realized if commercially viable solutions can be deployed at scale. Our analysis evaluated each of the more than 90 potential use cases against the four key factors that determine a use case’s feasibility in a given industry: standards and regulations, technology, asset, and ecosystem (Exhibit 5). While many companies are already experimenting, meaningful scale remains three to five years away for several key reasons.” (3)

Also, like innovation with many of the exponential technologies (artificial intelligence, quantum, etc.), blockchain is of course intrinsic disintermediation of a market.  Again, learning from the commercialization of AI Platform as a Service (PaaS) offerings in the last six years, something to look out for is the transformation of the legacy, linear value chain architecture of industry vertical in a value network.  In a value network, value propositions and the creation of value are based on the growth of nodes on the interconnectedness between technology platforms, strategic partners, suppliers, developers, etc.  This emergent value creation topology is what informs McKinsey’s strategic recommendation to semiconductor suppliers to concentrate on “microverticals up the stack.”  We encourage your organization to take McKinsey’s advice one crucial step further:  the blockchain technology stack will not be a linear technology stack at all but will be structured as a vast web of interconnected, self-organizing value networks fueled by the power of networked ecosystems.