Blockchain’s ‘over-promised and under-delivered’ dilemma

The potential of blockchain technology is undeniable. A cursory look online will reveal a number of think pieces detailing how blockchain technology can be utilized across multiple industries. One of the earliest documents compiling the various instances where blockchain technology may be useful came from Ledra Capital in its 2014 article aptly named ‘The Mega-Master Blockchain List.’

Some areas of potential adoption, like the financial sector, appear obvious and were the first that sprung to mind as it is easy to make the connection from digital currencies to the financial sector. However, researchers and stakeholders were able to make connections to seemingly unrelated sectors such as the supply chain, provenance, and even environmental concerns such as carbon credits.

In the years following Ledra Capital’s compilation, a number of banks, research companies and technology firms published their own reports on the blockchain’s potential. Reflecting the greater scrutiny that the technology was dealing with, many of the later reports were more in-depth in nature — going beyond simple speculations, many of these reports came with actual proofs-of-concept as well as actionable plans.

Simultaneously, there was an influx in consortia devoted to developing blockchain products for specific industries. An example of these is the R3 consortium, which has been working on creating a blockchain-based platform for the financial industry.

A slowed approach

As the value of the cryptocurrency market continued to grow, so did the interest in the technology underlying the sector. One of the major signals that the market was buying into the belief that blockchain technology held significant potential was the sheer amount of financial investment being poured into developing the technology.

McKinsey explains: "Venture-capital funding for blockchain startups reached $1 billion in 2017. IBM has invested more than $200 million in a blockchain-powered data-sharing solution for the Internet of Things, and Google has reportedly been working with blockchains since 2016. The financial industry spends around $1.7 billion annually on experimentation."

However, following the initial excitement into the potential of the technology, came a less rose-tinted look at the technology.

Comparing the pace at which use cases and proofs-of-concept were being theorized with the speed at which blockchain technology was actually being adopted shows a major disparity. While it is true that blockchain technology has the potential to provide underlying support in a manner that can revolutionize many sectors, this potential is seemingly slow to be realized.

Over-promised and under-delivered

The McKinsey report details a range of challenges impeding the adoption of this revolutionary technology. The first of these is the lack of actual products. Continued coverage of the technology on the media and large investments notwithstanding, there are few, if any actual blockchain-based products in use "in the wild."

The McKinsey report states: "The bottom line is that despite billions of dollars of investment, and nearly as many headlines, evidence for a practical scalable use for blockchain is thin on the ground."

If we are to consider the life cycle theory popular in economic theory perspective, it is obvious that blockchain technology is at the first stage. This might explain the slow and somewhat stuttering movement showcased by the technology and any of the products based on it that are in development.

What is different for blockchain technology, when compared to other potential investment sectors such as biotech and even artificial intelligence, is the intense media coverage which has been exacerbated by the ICO financing model, the proliferation of crypto exchanges and the resultant tsunami of speculators that poured into the sector in 2017.

This combination of factors resulted in expectations placed on blockchain projects both in terms of ROI and pace of product delivery that the sector couldn’t hope to deliver on.

Another major finding in the McKinsey report is the rise of competing solutions. Blockchain maximalists will tout the blockchain as the be-all and end-all solution to a range of operational inefficiencies. However, the reality is that there are a number of technologies that can compete with blockchain technology in some sectors. This is especially evident in the financial sector.

McKinsey expounds: "Numerous fintechs are disrupting the value chain. Of nearly $12 billion invested in US fintechs last year, 60 percent was focused on payments and lending. SWIFT’s global payments innovation initiative (GPI), meanwhile, is addressing initial pain points through higher transaction speeds and increased transparency, building on bank collaboration."

Additionally, deploying blockchain-based solutions can require a significant level of integration with an organization’s legacy systems. In the financial sector, this can be a dangerous affair as it represents significant monetary holdings. There are also legal considerations to be factored in when it comes to financial institutions and the systems they utilize. Additionally, many financial institutions are wary of adopting the technology because it may reduce or completely remove large portions of their existing revenue streams.

Moreover, financial institutions face the coopetition paradox, with many not willing to sink a significant amount of time, money and human resources into a technology that will ultimately benefit their direct competitors.

So that’s the finance sector — supposedly blockchain’s most obvious use case and the proverbial ‘low hanging fruit’, but so far at least it has turned out to be neither.

Occam’s Razor

So if not finance – then what? Referencing Occam’s Razor, which is the principle that states that the simplest solution is more likely to be the right or the best one, McKinsey believes that blockchain technology is best suited for areas other than the financial industry.

Its report concludes by saying: "An emerging perspective is that the application of blockchain can be most valuable when it democratizes data access, enables collaboration, and solves specific pain points. Certainly, it brings benefits where it shifts ownership from corporations to consumers, sharing "proof" of supply-chain provenance more vertically, and enabling transparency and automation. Our suspicion is that it will be these species of uses cases, rather than those in financial services, that will eventually demonstrate the most value."

If we were to go by the blockchain-based products that are actually proceeding beyond the theory stage, these are the sectors which stand out. Experiments in supply chain management, digital identity, as well as the sharing of public records have seen the most success. Arguably, in these situations, blockchain-based approaches are the simplest solution.

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