Has Blockchain Hit The Wall?

It was 4 o’clock in the morning and I had just spent another sleepless hour with a vital business challenge going round and round in my head. I had looked at the issue from multiple angles, considered best- and worst-case outcomes and worked through numerous solutions. A distraction was urgently needed. What else had been bothering me? The dog needed a new ball. I turned swiftly to Amazon AMZN . Like the business, the dog has very exacting requirements: the ball needed to bounce, squeak and be chew-proof.

 Next day, a large truck turned up outside the front door. The delivery man wrestled a large box out of the trunk and left it outside. I steeled myself to lift the box only to find that, to my disappointment, it was light as a feather. Opening the not-insignificant packaging, I dug through mountains of extraneous padding and protection and there at the bottom, nestled in the corner, was the ball I ordered. Unfortunately, it was the wrong size.

Don’t judge a book…

Like many people, I found the early promise of blockchain to be very exciting. Secure and verifiable end-to-end transactions. Massively reduced time spent exchanging and confirming information. These promised to be as transformative to commerce as the internet and browsers. In one stroke, blockchain technology would break down barriers between industry participants and create an infrastructure virtually impervious to fraud. 

The business I lead is focused on capital markets, and this market seemed ready for the type of step change that I imagined such a technology would bring. And the investment in blockchain globally has been significant. Worldwide spending on blockchain solutions is forecast to grow by over 60 percent between 2018-2023, reaching nearly $15.9 billion in 2023[1].

Some of this investment will undoubtedly result in new solutions, particularly where it solves performance problems. For example, various smart contract solutions, such as for trade finance or transaction processing, are based on blockchain. And blockchain continues to power the digital currencies where the technology first started life.

Yet at the same time, over 90% of blockchain projects fail, with an average lifespan of a little over a year[2].

What’s happened? Will blockchain quietly fade away, despite many organizations’ best efforts, just as numerous other innovations with promising futures have done before? I don't think that’s the case. But we need to understand the three reasons it hasn’t yet delivered on the scale envisaged:

1. Blockchain is expensive to operate and consumes multiples of processing power compared with traditional secure messaging. To put this in context, each blockchain-powered bitcoin transaction uses around 657 kWh of electricity. That’s the equivalent of 59 days of electricity used by an average British household[3]. This makes it both slow and lacking in the environmental credentials that we now expect from modern technologies.
2. For a messaging platform to become ubiquitous, it needs to do more than just be secure and verifiable. For example, the content or format must be instantly recognizable. Conversely, blockchain is just the packaging.
3. There are already a number of ways to ensure and verify data between transaction participants. These mechanisms may not be as functionally capable as a blockchain solution, but they’re well-understood, deliver an acceptable level of performance, use far less electricity, and do not require substantial change to implement. In short, they’re good enough.

No drama

So blockchain hasn’t been a game-changer. Instead, it’s essentially an infrastructure for transport and packaging. Furthermore, as in the case of digital currency-based investment classes, the problems of custody and ownership needs to be solved before blockchain can be adopted more broadly. In these situations, the challenge may be overcome by creating more private or ‘owned’ blockchain infrastructures for specific uses. However, the average transaction cost for a private blockchain is estimated at US$5, whereas the cost of public blockchain transactions is nearer to 5¢.[4]

 For investors, fintechs and enterprises thinking about using blockchain, there are a number of issues to consider, in addition to return on investment. In particular, for a solution to be pervasive it needs scalability:

• The unit cost of operating and processing. If the cost is linear, it will have a shorter life.
• The potential for broad participation, or a low cost of entry
• Open access, with broad agreement from participants on the format of transaction contents. If there is no standard format, then participants need the ability or tools to translate content easily to/from the format they need.
• If it is an internal investment, be careful about the technology assumption that blockchain is the answer and insist on costed, viable alternatives. There may be other, possibly simpler, ways to solve the problem. This applies particularly if the contents of the message or transaction are straightforward, or there are only a few participants to a transaction.

Happily, the large box, unnecessary packaging and incorrect contents of my Amazon order have all been addressed by Amazon’s process of refinement and investment, and my own (probably temporary) discipline in keeping away from online ordering at 4 am. While there’s a fair bet that there will a similar refinement and some very useful outcomes from blockchain, it will be only one approach to solving business problems, rather than the transformational catalyst that I, and many others, had hoped for. It certainly won’t help me stop worrying about seemingly insurmountable problems in the small hours of the morning, although in that instance, a five-minute call later that morning did the trick.

[1] https://www.idc.com/tracker/showproductinfo.jsp?prod_id=1842

[2] https://www.forbes.com/sites/dantedisparte/2019/05/20/why-enterprise-blockchain-projects-fail/#360265504b96

[3] https://www.thebalance.com/how-much-power-does-the-bitcoin-network-use-391280

[4] https://www.ey.com/Publication/vwLUAssets/ey-total-cost-of-ownership-for-blockchain-solutions/$File/ey-total-cost-of-ownership-for-blockchain-solutions.pdf