Whatever Happened to Enterprise Blockchain?
Blockchain uses in business are still misunderstood and suffer from bitcoin's eclipsing presence.
This month’s newsletter is a bit different than the usual. It comes in two parts: an article followed by a relevant case study.
Earlier this month, Coindesk reported1 on how IBM’s blockchain team has all but vanished. Missed revenue targets, reorganizations, and layoffs seem to have deprioritized IBM’s blockchain efforts and blended its offerings into the rest of the business. Is this yet another sign pointing to the elusiveness of enterprise blockchain?
Blockchains enable value exchange and shared record-keeping among their participants using programmed mechanisms and rules. It’s worth pointing out that the mystique behind this technology comes from the bitcoin blockchain, where many anonymous participants who mistrust each other can securely transact and exchange value. In the bitcoin blockchain, incentives and rewards are embedded in such a way as to make fraud too expensive. The result is an unalterable value exchange system that works without the need for a trusted third party (e.g. a central bank). On the flip side, transacting with bitcoins consumes much electricity, is slow and has low throughput (compared to centrally managed databases). These costs are a direct result of bitcoin’s design which ensures consensus among the many unknown participants.
The idea of bringing bitcoin’s blockchain into the enterprise gained momentum over the past few years. Many use cases were imagined in supply chain management, payments settlement, intellectual property tracking, voting, and energy trading, to name a few. Enterprises hoped to increase transparency, streamline processes, and cut costs within their complex ecosystems.
Where’s the evidence?
The British Blockchain Association (BBA) published a study2 last year evaluating 517 blockchain projects based on their “Evidence-Based Blockchain” methodology. The study collected projects’ claims on problems being solved and outcomes achieved. It then assessed the quality of the supporting evidence behind those claims.
The results were unflattering (emphasis is mine):
Our study concluded that almost half of the blockchain firms show no explicit evidence of the problem to be solved. Approximately one-third fail to cite a comparison and intervention analysis, and less than 2% demonstrate evidence of outcomes backed by filtered (critically appraised, peer reviewed) information.
The study outlined several key problems that the blockchain industry faces:
Inability to clearly define the problem to be solved. Sometimes blockchain is applied to a problem that does not exist or is not significant enough.
Widespread over-reliance on superficial data sources, like media articles and blog posts, when trying to understand and evaluate blockchain technologies.
Inadequate sharing of blockchain experiment results. Companies would keep the results to themselves, especially if the experiments were less than successful.
There were hundreds of announcements over the past few years from governments and companies on the launch of blockchain pilots; some have fizzled out, some are trudging along, and some have succeeded. The BBA tells us that the latter category is a small minority.
But what about the Deloitte Blockchain survey?
Deloitte’s 2020 Global Blockchain Survey found that 55% of senior executives place blockchain as a top-five priority. The survey also found that 39% of respondents had “brought blockchain into production,” meaning that the technology is used to support real business processes.
The numbers are impressive, and Deloitte says they suggest “that blockchain is solidly entrenched in the strategic thinking of organizations across industries, sectors, and applications.” But the survey leaves a lot to be desired. Surveys are directionally useful, but their results are at risk of being tainted by biases. And when it comes to surveying emerging and often misunderstood technologies, the risks can amplify:
We are left to wonder to what extent the blockchain applications in production solve real problems or achieve desired outcomes. The projects may be tangential, experimental, aspirational, or even “vaporware” for all we know. If the blockchain in production projects were to be put to the test, would the results mirror the British Blockchain Association's findings? Would they be mostly weakly substantiated?
A perplexingly large number of respondents - 83% - believe that “digital assets” will “serve as an alternative to, or outright replacement for, fiat currencies in the next five to 10 years”. This view is usually reserved for so-called Bitcoin Maximalists, who believe that fiat currencies' collapse is inevitable and that bitcoin will dominate as a global currency. Within the crypto community, maximalists express extreme libertarian views. I can’t imagine 83% of the nearly 1,500 surveyed global business executives belong to the maximalist camp. So, either the survey design was flawed, or respondents’ knowledge about crypto and blockchain was superficial.
The survey also found that the number of respondents who consider blockchain to be “overhyped” rose significantly from previous years. And Deloitte does admit to the presence of “incoherence” in the blockchain space. This survey leaves us with more questions than answers.
Divorcing enterprise blockchain from bitcoin’s grand expectations
The researcher and academic Hanna Halaburda has shown3 that “what gets bundled up as blockchain technologies - smart contracts, encryption and a distributed ledger - are separate concepts. The three may be implemented together, but they do not need to be.” In fact, these separate technologies have been around for many years before bitcoin’s invention.
Halaburda then calls out a fundamental misunderstanding: pundits erroneously extrapolate that any blockchain will have the properties of bitcoin’s blockchain - a distributed system that runs without a central authority, allowing anonymous and mistrusting participants to transact securely:
This extrapolation may come from an illusion that the Bitcoin’s blockchain properties come solely from technology, while they actually come from a combination of technology and an incentive system that accounts for the behaviour of human participants.
The term “blockchain” conflates bitcoin’s unique innovation with the set of three technologies - smart contracts, encryption and distributed ledger. This can only lead to unfounded expectations like the British Blockchain Associations has uncovered and the incoherence and overhyping that Deloitte mentioned.
A better approach would be to examine and understand the parts, not the whole. Halaburda says:
…precision matters for estimating costs and benefits, or even for predicting the best uses of blockchain technologies. Smart contracts, encryption and distributed ledger each bring different benefits. And since they can be implemented independently, an optimal solution for a particular application may include only some of these tools but not others.
Blockchain is background technology
Researchers4 from the Sam M. Walton College of Business at the University of Arkansas recently studied over a dozen enterprise blockchain applications. They give a reality-check:
These first-generation [blockchain] applications are delivering business value, but they do not disrupt, transform, or obliterate existing structures; rather, they complement and grow ROI on existing technology…by removing friction shared by ecosystem partners. They can be characterized not as a tidal wave of disruption but as a rising tide that lifts all ships.
They went on to firmly place blockchains as a “backstory” rather than a “game-changer”:
Successful applications are business-led collaborations aiming to solve ecosystem-level challenges. Without wide-ranging agreements across entities (consortia), blockchains are useless.
Contrary to common belief, and unlike bitcoin, enterprise blockchain applications do not eliminate trusted third parties; they often introduce new ones.
The researchers offer an important piece of advice for organizations looking into blockchain solutions:
Ecosystem partners need to be sold on the business vision, and the technology implementation should be relegated to the background.
In other words, transformation is not about technology.
And here is the case-study:
National Research Council of Canada (NRC): InterPlanetary File System (IPFS) Blockchain
I submitted an Access to Information Act request to obtain details of Canada’s National Research Council’s (NRC) blockchain experiment. The NRC had contracted with a Canadian blockchain startup to run an experiment to publish public disclosures on a blockchain-based storage system called the InterPlanetary File System (IPFS).
IPFS would store NRC’s files on many personal computers worldwide (nodes) rather than on central servers like most web pages. Publishing content on the IPFS blockchain would mean that the content is immutable, unalterable, and would theoretically last forever, just like bitcoin transactions. By contrast, centrally-hosted web content may be altered, removed, and wouldn’t necessarily look the same in a few years.
The experiment ended in March 2019, and the NRC never issued a public post-mortem. Here’s what I gleaned from the more than one hundred pages that I received from the NRC:
Soon after the experiment's launch, an employee at the NRC sent an email detailing the pros and cons of IPFS. He explained that with IPFS, the NRC would lose its ability to comply with regulations or court orders to take down content (remember, on the IPFS, content is immutable). And what about the benefits of such a system? No more broken www links. Hardly a burning pain-point for the Government of Canada, I would say. The employee concluded: “we would not be allowed to operate such a system, as a government institution.”
Remarkably, the experiment went ahead anyway at a cost in the hundreds of thousands of dollars. Why? Vanity.
In one Go/No-Go decision document, employees listed the following key consideration:
“NRC received considerable praise for providing a real-life, fully-functional public blockchain solution. We could further that praise by continuing to prove our capacity to experiment by releasing the blockchain explorer application to IPFS.”
In other correspondence, it was clear that NRC’s reputation as an innovator in the space factored into deliberations on extending the experiment. The perceptions of other government departments (OGDs) were listed as distinct pro/con entries.
The NRC IPFS project was technically in “production” for a period of time; it did not solve a real problem; it was unworkable but was allowed to exist due to hype.
Evidence-Based Blockchain: Findings from a Global Study of Blockchain Projects and Start-up Companies, The British Blockchain Association.
What We’ve Learned So Far About Blockchain for Business, MIT Sloan Management Review.