The Promise and Current State of Blockchain
I recently participated in a blockchain panel at a conference of senior supply chain executives from a variety of companies. I welcomed the opportunity to learn how these real-world executives feel about blockchain, as well as how to best communicate the promise and current state of this emerging and potentially transformative technology. Let me share a few of my observations.
Before our panel started, the executives were asked how they viewed blockchain. In general, they felt that there was too much hype surrounding blockchain, were skeptical about its value to supply chain systems, but expressed a wait-and-see attitude. They were then asked how many were conducting blockchain prototypes in their companies. The majority raised their hands.
I thought that their views and subsequent questions and comments during the panel succinctly captures the current state of blockchain in the business world: skeptical, turned off by the hype, but hedging their bets by getting on the learning curve with prototypes and experimentation.
The moderator first asked each panelist to address the audience’s skepticism about blockchain. What, in our opinion, is the key value of blockchain? I said that I look at the value of blockchain through two complementary lenses: enhancing the security of the Internet, and reducing the inefficiencies and overheads in applications, like supply chains, involving multiple institutions.
The Internet is fundamentally a general purpose network platform supporting a remarkable variety of applications. A major reason for its ability to support such a rich diversity of applications is that the Internet’s foundations, its TCP-IP layer, has stuck to its basic data-transport mission, i.e., just moving bits around. It has no idea what the bits mean or what they’re trying to accomplish. That’s all the responsibility of the applications running on top of it. It’s good-enough but not optimal for any one application. In particular, the design decisions that shaped the Internet back in the mid-late 1980s didn’t optimize for secure, trustworthy operations. There’s no one overall owner responsible for security, - arguably the biggest challenge facing the Internet today
The first major promise of blockchain technologies is to help us enhance the security of Internet transactions and data, by developing a blockchain fabric layer with the required standard services for secure communication, storage and data access, along with open source software implementations of these standard services which all blockchain platforms and applications would support.
The second major promise of blockchain technologies is to help lower the costs and improve the efficiency of business transactions among institutions around the world for supply chain management, financial services and similar applications involving multiple institutions.
Over the past two decades, business process reengineering and enterprise resource planning (ERP) applications have had a major impact on lowering the costs and improving the efficiency of transactions within a firm. But, as we well know, the Internet and globalization have significantly increased the volume of transactions among institutions around the world. As this 2017 HBR article pointed out, the critical tools and processes to manage this increased flow of transactions has not kept up with the economy’s digital transformation. “They’re like a rush-hour gridlock trapping a Formula 1 race car.”
Blockchain technologies promise to significantly improve the efficiency of applications involving multiple institutions, - like global supply chains, - by increasing the speed, security and accuracy of financial and commercial settlements; tracking the supply chain lifecycle of any component or product; and securely protecting all the transactions and data moving through the supply chain. Blockchains provide an immutable, non-revocable record of all the transactions through the entire supply chain cycle, which will be of great help in the timely resolution of errors and disputes among supply chain partners
We then had a very interesting discussion with the audience. Let me share a few of their questions and comments.
What do we mean by blockchain?
Let me answer this question by first asking: what do we mean by the Internet? Strictly speaking, as per the Wikipedia definition, “The Internet is the global system of interconnected computer networks that use the Internet protocol suite (TCP/IP) to link devices.” However, we often use Internet to refer to not just the TCP/IP network platform, but also to the vast number of applications and apps that use the platform, including the World Wide Web, e-mail, e-commerce, streaming music and video, navigation, and so on. We might say that we watched a film on the Internet, even though strictly speaking we watched it on Netflix, Amazon Video, Hulu, or some other streaming video application on the Internet.
Similarly, blockchain is a distributed ledger platform based on a number of advanced technologies. It’s key functions are to enable the secure, transparent sharing of data and to process transactions among multiple actors that may not know or trust each other. The basic blockchain platform or fabric doesn’t know what the data and transactions do. That’s all up to the applications it supports.
For example, having a blockchain-based distributed ledger that all partners in a supply chain ecosystem have access to and trust will help resolve errors and disputes, but only if the application calls for storing the information required for resolving disputes and if the governance of the supply chain has the proper processes in place for resolving disputes among its members. The blockchain platform on its own will do none of those things, just like the basic TCP/IP Internet platform on its own will not provide access to a web site or stream videos.
Key here is the all-important role of open standards. In the 1980s, it was quite difficult to get different IT systems to talk to each other. We had a number of proprietary networks and e-mail applications, but just sending an e-mail across two different applications from two different vendors was quite a chore. We had file systems, but exchanging file across disparate systems from different vendors was really difficult.
That’s why the global research community, which had a great need to communicate and share information, developed and embraced the TCP/IP networking standards and the SMTP, MIME, POP and IMAP e-mail standards in the mid 1980s, followed a few years later by the adoption of the HTML, HTTP and URL Web standards. In the early 1990s, - frustrated with the complexity of developing network-based applications, - the wider commercial marketplace embraced these open Internet, e-mail and Web standards.
The Internet was just another network. Similarly, blockchain is just another distributed ledger or database system. The key difference are the set of standards being developed and increasingly embraced for blockchain platforms, that should make it significantly easier for companies across different industries to be part of blockchain-based ecosystems, like those involved in supply chains and financial services. This is particularly important because a company will likely be part of multiple supply chains, and it would be really helpful if they were all based on the same basic standards.
There’s too much hype surrounding blockchain
True, but not surprising for a potentially transformative technology. Remember the dot-com bubble of the late 1990s. Much of the hype about blockchain is way premature. In my opinion, blockchain is still in its early phase of market experimentation and leading-edge customers. It isn’t quite ready to cross the chasm to a more mainstream phase of pragmatic customers less interested on the technology than on the value it brings them.
The Internet was embraced by a fast growing mainstream market in the mid-1990s. Blockchain is nowhere near as mature as the Internet was then, more akin to the Internet in the late 1980s. Much work remains to be done on public and private platforms like Ethereum and Hyperledger, as well as on interoperability across platforms. Applications now in the experimental stage have to move into production while new applications are developed across different industries.
Much of the success of the Internet and World Wide Web is due to the international organizations created to oversee their evolution, including IETF, ICANN, and W3C. In addition to developing standards and organizing technical, industry and policy activities, these various organization make available open source implementations of their software releases, thus encouraging collaborative, open innovation.
Similarly, blockchain’s success will largely depend on its governance, that is, on how its various stakeholders manage its evolution, including the legal and regulatory frameworks required to govern the interactions of institutions around the world.
While blockchain promises to disrupt business models and transform industries, there’s still much work ahead to turn the promise into reality.