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Cutting Through The Blockchain Hype

Updated: Nov 21, 2018

There is rarely a day when the news does not have a passing mention of “the blockchain” and how it is the most revolutionary technology since the introduction of the commercial Internet in early 1990s. Nearly everyone seems to have made it to the cheerleading squad and the excitement draws everyone’s interest. But it’s very clear that the most excitement revolves around cryptocurrencies, altcoins, initial coin offerings and the creation of sudden millionaires and in some cases billionaires.

It’s a shame that the true potential of the blockchain is overshadowed by this hype leaving some people to wonder whether it is a fad. Certainly the lack of clear compliance frameworks and regulations for cryptocurrencies is not helping to build trust in this platform either.

The good news is that after initial dismissal, some large public companies have started to explore the potential of the distributed ledger technology inspired by Bitcoin and Ethereum. Trends tend to build inertia and, right or wrong, cryptocurrencies will push enterprises to look at the possible use cases of the blockchain in their companies.

For the most part large enterprises have been very quiet about their work so far. The vast majority of all the articles, videos and podcasts seem to be referencing the same use cases. Diamond tracking, car buying value chain, a few small banking examples, supply chains (mostly oversimplified versions of supply chains) and tracing lettuce. Most of the proponents have been the large systems integration companies. Yes, the same ones who did your ERP systems.

There is still a lot of misconceptions about the blockchain.

First, there is no such thing as one blockchain. There are several of them such as Ethereum, EOS, NEM, Stellar and Hyperledger to name a few. They have the common underlying attribute of being arbiters of verification but their designs vary as they have different strengths and ideal use cases.

Choosing the right blockchain for your use case is critical. There is a lot of momentum with Ethereum because it pioneered smart contracts – computer code that executes when certain conditions are met. Stored procedures anyone?

Ethereum has mostly been used to raise money using the phenomenon of initial coin offerings. Its smart contract feature makes it ideal for software-initiated irrevocable agreements. Think of it as a more sophisticated version of crowd funding systems like IndieGoGo or Kickstarter and add the possibility of making (or losing) a ton while supporting a business model or a company. However, it is so incredibly buggy that nearly every single hack has happened on Ethereum. Not to mention it is incredibly slow with the actual block time around 15 seconds.

Just to give you an example, Nasdaq provides technologies for the entire lifecycle of a trade from risk management to trade to surveillance to clearing. Their systems process more than 1 million messages per second at sub-40 microsecond speeds with 99.99% uptime in more than 70 marketplaces across 50 developed and emerging countries. Etherium at NASDAQ speed? Not today.

Another marker to consider is amount of money transacted in the entire cryptocurrency world. As of October 8, 2018 the volume was $12,699,182,616. Now, Citibank’s Global Transaction Services, that I was the Global CTO for, transacted $3 trillion to $9 trillion a day or roughly $1.25 quadrillion a year. Not to be trite, but $12 billion a day is a rounding error when you consider $9 trillion.

Simply put, no blockchain can handle a true real-time global financial system today. Caveat today. It may change with the convergence of 5G, artificial intelligence, supercomputing or even quantum computing and the appropriate cybersecurity protocols. When is tomorrow? Maybe 2 - 5 years from now. Who knows?

Another caveat is using blockchains that are not truly decentralized as in you will have 10, maybe 50 permissioned nodes but that’s almost like having 10 – 50 real-time backups of your data. That is hardly an improvement from what companies do today. If you’re a large enterprise that needs high throughput and real-time systems for your global business then I do not see blockchain in your immediate future.

Hyperledger, a blockchain backed by IBM and the Linux Foundation seems to be getting the most traction in the enterprise space. It’s a blockchain backed mainly by industry behemoths and it is a consortium model.

Note the word ENTERPRISE. It was not long ago that ERP systems dominated enterprise computing and a ton of software companies and consulting companies made a ton of money. Remember SAP, Oracle, Peoplesoft, JD Edwards and several other smaller ones? I was privileged to be a partner at EY at that time and saw massive budgets, time and hundreds of people put into ERP systems. The dollars spent was staggering. A billion-dollar implementation was not uncommon.

Guess what? All those systems built in the late 1990s to the mid 2000s are still running every large enterprise on the planet. I will bet that they have not even been fully depreciated and they work very well. They might not be on fancy responsive web screens but they do the job. To bring blockchain to any enterprise will not cost any less than an SAP implementation, will not take less time and will not use less people.

Large companies are not going jump into blockchain because it’s trendy. No one has actually built a cost model and ROI model to implement enterprise level blockchains. Blockchain lab work and prototypes are exactly that… science experiments. Important but not enterprise mission-critical and must prove real ROI.

Is there hope in the enterprise world for blockchains? Of course. It will begin from small departmental or maybe even divisional efforts. It will solve specific and measurable problems with real ROI. Enterprises will start from smaller departmental implementations of private blockchains. These smaller implementations will show the power of decentralized applications and immutable verification. I would not bet on SAP-like or Oracle-ERP-systems-like implementations in the near future.

Will there be opportunities?

Clearly yes!

If your large enterprise is considering jumping in to the blockchain, you have to carefully consider why you are getting into enterprise blockchain, how much it will cost and will it return real profits, delighted customers or substantial savings.

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