Lost in the Bitcoin mania and feud over whether it’s the latest form of get-rich-quick speculation or a legitimate new form of currency is the fact that Bitcoin and similar cryptocurrencies are built upon blockchain, a technology for distributed, secure ledgers with utility in commercial applications. Bitcoin has generated enough hype that there’s plenty of spillover to fuel exuberance for related blockchain technologies, namely an assortment of so-called altchain distributed ledger systems.
These systems aren’t designed to replace sovereign currency, but to streamline, secure and automate business processes and information sharing. As such, they eliminate some of the complexities and adverse externalities of Bitcoin, notably energy-intensive coin mining, financial speculation and ledger/currency forks.
Nevertheless, such business blockchains come with their own set of challenges since the concept of programmable distributed ledgers is sufficiency unique that they can’t easily substitute for established processes. Some skeptics doubt they ever will.
Note that proponents of systems like Ethereum, Hyperledger and Quorum that are targeted to scenarios in business and financial markets might argue details, but for our purposes, they share enough similarity with the cryptocurrency ledgers people have heard about to use the term ‘blockchain’ interchangeably.
While I don’t share the view that blockchain provides minimal benefits to existing forms of software automation, it’s doubtful that blockchains will soon displace many enterprise processes, as a look at its history of problems and prior technological analogs will show.
A history of financial risks and futility
Blockchain boosters see a raft of business applications such as settling international payments, securing and expediting lines of credit, streamlining supply chain management, automating energy trading, recording and settling real estate transactions and insurance claims through so-called smart contracts, and securely sharing healthcare information.
However, skeptics see little value in layering a distributed ledger atop systems that have long been software automated. One of the most thorough blockchain takedowns comes from Kai Stinchcombe, co-founder and CEO of True Line Financial, who recently wrote that (emphasis added),
After years of tireless effort and billions of dollars invested, nobody has actually come up with a use for the blockchain — besides currency speculation and illegal transactions.
Each purported use case — from payments to legal documents, from escrow to voting systems — amounts to a set of contortions to add a distributed, encrypted, anonymous ledger where none was needed. What if there isn’t actually any use for a distributed ledger at all? What if, ten years after it was invented, the reason nobody has adopted a distributed ledger at scale is because nobody wants it?
Although many of blockchain critiques focus on Bitcoin as a currency, he also pokes holes in the technology’s use for smart contracts, stock issuance (IPO replacement), distributed storage, secure messaging and user authentication. Of course, cryptocurrency is where everyone is now focused and here, between Bitcoin’s wild price swings, history of theft and risk of losing or forgetting one’s credentials, it’s a poor substitute for banking. Citing the Mt. Gox debacle, Stinchcombe quips,
Imagine the world if more banks had been drained of customer funds than not. Bitcoin is what banking looked like in the middle ages — ‘here’s your libertarian paradise, have a nice day.
He also notes that use of blockchain as a platform for micropayments has been lukewarm at best, noting that clearing Bitcoin transactions isn’t as instantaneous and friction-free as advertised, making it unsuitable for things requiring instant gratification like one-time content purchases, which is why small-dollar subscriptions have proven more efficient and popular.
The situation isn’t any better for settling large transactions where Stinchcombe notes that, despite being available for three years, the blockchain-based Ripple system for bank transfers handles as much transaction volume in a month as the SWIFT interbank network does in 40 seconds, i.e. a 65,000-times difference. While I can’t verify his numbers, nor contention that the overhead of the two systems is comparable, as someone who runs a financial business, I’ll trust someone with first-hand experience and a business incentive to use the most efficient settlement mechanisms available.
Granted, major banks and financial firms have made no secret of their investments in blockchain technology, however these are still lab experiments, not production systems. Furthermore, Stinchcombe points out, the notion of blockchain eliminating financial middlemen is a pipe dream since institutions like NASDAQ, banks and even the IRS are intermediaries for a reason: people and governments require a level of accountability and legal compliance that can’t be automated away.
What about process automation?
The poster child of blockchain business scenarios is the smart contract, namely self-executing contracts and transactions that are cryptographically secure, verifiable and irreversible. These sound better on paper than in practice, since as Stinchcombe notes, aside from perfunctory boilerplate like EULAs, contracts are typically complex instruments that require negotiation and haggling. Furthermore, the consequences of a hacked, irreversible contract are sufficiently dire that few organizations want the risk for minimal benefit. As he puts it,
Even the most die-hard blockchain enthusiasts actually want a bunch of humans arguing about the underlying intention behind a contract, rather than letting the software self-execute.
The situation isn’t much better for other automatable, usage-based subscription-backed software purchases like cloud services. Sure, a smart contract might be able to automatically instruct AWS to spin up new compute instances, add storage and connect it to a load balancer, but AWS and other cloud services can already do this and adjust your monthly bill accordingly. As Stinchcombe points out,
The idea that smart contracts would change this is a fallacy — it conflates the legal arrangement being put into effect with software with the legal arrangement itself being coded as software. Amazon’s terms of service are not a smart contract, but the billing system that implements those terms is automated.
Don’t discount blockchain just yet
Current proposed blockchain uses often seem like trying to pound a square peg into a round hole, however it’s too early to discount the technology. The reason, according to two Harvard Business School professors, is that unlike most overhyped technologies, blockchain isn’t disruptive, but rather foundationational; i.e. it’s less like the cell phone and more like the TCP/IP protocol. As such, they write that,
It has the potential to create new foundations for our economic and social systems. But while the impact will be enormous, it will take decades for blockchain to seep into our economic and social infrastructure. The process of adoption will be gradual and steady, not sudden, as waves of technological and institutional change gain momentum.
The professors recount the 30-year history of TCP/IP maturation as it evolved from an experimental network for academics and researchers to a ubiquitous communication platform that enabled new products, services, business models, even industries. Their work shows that,
History suggests that two dimensions affect how a foundational technology and its business use cases evolve. The first is novelty—the degree to which an application is new to the world. The more novel it is, the more effort will be required to ensure that users understand what problems it solves. The second dimension is complexity, represented by the level of ecosystem coordination involved—the number and diversity of parties that need to work together to produce value with the technology.
Applied to blockchain, it means that as applications such as smart contracts change broader economic, social and political systems, thus affecting more users, they require coordinated activity of many stakeholders and concomitant “institutional agreement on standards and processes.” For example,
A tremendous degree of coordination and clarity on how smart contracts are designed, verified, implemented, and enforced will be required. We believe the institutions responsible for those daunting tasks will take a long time to evolve. And the technology challenges — especially security — are daunting.
Thus, blockchain is still in the ‘start small and experiment’ phase and likely a decade or more away from substituting for critical, well-established and trusted business processes.
An alt view from Jon Reed
Fellow analyst Jon Reed was scathing about Stinchcombe’s approach noting that:
Most of the objections Stinchcombe raises from the peanut gallery are problems to be solved, not insurmountable obstacles. I don’t see blockchain as revolutionary, but I believe we’ll see subledger scenarios where it proves effective.
He neglected, however, to break down one of the most interesting use cases, a Chinese food safety alliance with IBM, Walmart, JD.com and Tsinghua University. (“Recent testing by Walmart showed that applying blockchain reduced the time it took to trace a package of mangoes from the farm to the store from days or weeks to two seconds.“) It stretches credibility to imagine this alliance was formed out of vanity, or a marketing push to find a sexy slide for a distributed ledger project.
Even as blockchain projects go live, critics like Stinchcombe might ask, “did this have to use a distributed ledger?” If there isn’t a convincing answer, he’ll have a point. Though in the Walmart-IBM alliance, it’s “traceability and transparency” that justify the tech. Note: I get into live projects and outlook in my chat with Hyperledger’s Director in Is blockchain enterprise-ready? A Hyperledger gut check with Executive Director Brian Behlendorf.
Editor’s note: I thought that with single ledger systems like Workday that we’d consigned the horrors of subledgers to the dustbin of history. Clearly, I’m wrong. For now.
Stinchcombe’s voice may be the one receiving more than its fair share of attention but he is not alone. In an op-ed on Medium, Rick Bullotta asks the prosaic question: Is Blockchain A False Sense of “Trust”? Once again, a not unreasonable argument but one we’d expect to see addressed at the enterprise level in fresh iterations of variants like Hyperledger.
It’s easy to let blockchain skepticism descend into cynicism, particularly when the popular focus is on Bitcoin as the latest easy money scheme. I remain dubious that cryptocurrencies will ever play a meaningful part in either our business or personal financial affairs since its professed advantages of efficiency, anonymity and security will (or have been) eroded by laws, regulations, hacks and criminal exploits. Other colleagues see cryptocurrencies as little more than a Ponzi Scheme – and with some justification.
Nevertheless, blockchain technology as a secure, immutable, auditable transaction ledger has promise as a process accounting and automation tool, particularly when used in the context of open platforms like Hyperledger (see our discussion with its Executive Director here) that are designed for business scenarios, not crypto money laundering.
I agree with the Harvard professors that there’s a good chance that blockchain will affect your business, “The very big question is when.” The long evolution gives organizations the luxury of time to strategize, experiment, start small and scale. There’s no need to let the Bitcoin gold rush stampede you into rash, misguided and costly reactions.
Image credit – © Elnur – Fotolia.com
Disclosure – Workday is a premier partner at time of writing