As we enter month number 11 of the great (crypto) depression, there are a few observations worth noting. The price of bitcoin has broken below the $4,000 support level, falling to roughly a third of what it was valued at this time last year. The regulators, namely the SEC, are starting to crack down on entities and individuals they deem to be ‘non-compliant’, the most recent incident seeing EtherDelta founder Zachary Coburn being fined up to the tune of $400K for “operating an unregistered securities exchange”. Finally, it’s been estimated that between 600,000–800,000 miners have shut down operationsamidst price declines, causing a significant decrease in hash rates across more traditional PoW blockchain platforms like Bitcoin and Ethereum.
So what does this mean for the space? Market sentiment seems to point to an array of unsettled ‘hodlers’ who have either purchased crypto-assets during the period of inflated prices at the beginning of the year, or those who are simply frustrated at the lack of ‘the next bull-run’ which always seems to be pegged for “next month”. This month has seen a vicious culling of retail investors as we’ve started to see a growing number of people throwing in the towel on this once revered technology.
Enterprises are often regarded as model examples of success, how have these traditional behemoths held up against this pioneering new wave of technology?
According to a report by Gartner, we have seen 231 ‘proof of concepts’ (PoCs) across 167 consulting engagements in 2018 so far — the majority centred around finance, insurance, telecommunications, and media. This is reminiscent of the start of the year where prices (and moods) were at an all-time high. Companies, afraid of missing out on this golden opportunity, abandoned most of the logic and standards that they upheld in favour of ploughing millions of dollars into PoCs majority of which are experiencing difficulty gaining traction.
Take Sirin Labs, for example, a Swiss-based smartphone developer that raised $158M in an ICO back in December. Their native ‘token’, so to speak, represented nothing more than a method for payment on this non-existent protocol they pitched coupled with a “premium discount” for any individual who purchased their upcoming blockchain-based smartphone. The team initially grew rapidly and then, almost as quickly, aggressively downsized as the market took a turn for the worse and the team didn’t have a clear vision of their target market. A year later they are launching their finished product, the ‘Finney phone’, and yet I still fail to see the demand for such a device. Truth be told, building a cold wallet into a hardware device that you carry around and use with you on a daily basis is indeed handy, but ineffective if you are unable to inoculate a large customer base for your service, not least forgetting the numerous security hazards that arise with trusting your assets to a single manufacturing source.
In fact, of the 231 PoCs Gartner reported on, only 14 have moved into a limited scale live-in production environment, reflecting the immaturity of the market we’re seeing today. The same report estimates only 10% of these projects will make it to a fully-scaled business model by 2020. Given this predicament, it’s no surprise seeing enterprises employing stricter vetting processes and restricting spending on DLT projects overall.
This isn’t, however, to say that all of this investment has been for nothing, more so its led to several established brands getting ‘burned’ which has now flipped the mood of corporates to the other extreme end of the opinion. This was best summed up by Deloitte’s Chief of Blockchain, Linda Pawczuk, in an interview with CoinDesk earlier this month where she explained how the reputation of bad actors in the ICO space was causing clients to question the validity of the technology and deter their attention away from the core benefits of the technology itself. She exclaims “Can we stop talking about my bad brother? Can we start talking about my brother who is the Olympic champion?”
In 2017, enterprise blockchain was heavily focused on the financial industry (around 80% PoCs) as a means to disintermediate the fractured lines of communication between parties and to build out confidence in data. These were the main proponents of blockchain’s immutable ledger where companies saw an opportunity to revamp storing, maintaining and sharing records in a dynamic way. 2018, however, marked a shift away from financial use-cases as a growing need for stable regulatory frameworks took precedent. Instead, we observed a surge of interest in a number of industries including Manufacturing and Natural Resources, Healthcare, and Communications & Media services.
Of these three verticals, the healthcare industry has probably been the most conservative, prioritising use-cases focused on records-keeping and identity management such as the ID2020 initiative spearheaded by IBM and the US Food and Drug Administration. Communications and media services pushed paradigms forward by exploring ways to distribute and maintain data among multiple parties, as seen in use-cases exploring royalty payments or data rights management. However, the largest draw has been towards the manufacturing industry, specifically, supply chain.
With large, well-known brands such as IBM, Walmart, Oracle and SAP building out scalable PoCs and some even stepping up the production capacity (see Walmart’s latest announcement), there has been a lot of new investment pouring into this area with dedicated working groups and consortiums popping up in each industry looking at new ways to unify fragmented flows of money, goods, and information.
Reasons for why interest has expanded to these industries are still quite subjective and in a landscape still rife with smoke and mirrors, trends can often be borne of sheep mentality. However, a few interesting points to note are that regulatory restrictions are less abundant in these industries and consultancies that are advising on these projects are most likely top of the funnel for these use-cases, which means they can command a degree of IP ownership over a solution and also determine which blockchain platform to use. Furthermore, reducing inefficiencies and cutting down costs in existing business models (whilst boring) is simply more attractive to legacy businesses to adopt and build than the disruptive solutions being launched and failing (mostly).
Whilst I think that attention is being drawn back to the finance world in the form of 2019 is the year for ‘tokenized securities’, I briefly wanted to mention a few emerging groups that are starting to dabble more in this blockchain world.
First up are government entities who are focusing, at high-level, how to track assets. Use-cases range across building robust identity platforms for citizens, property registration and voting management. The Singapore central bank and their national exchange have even gone as far to build a Delivery vs Payment platform that can track the movement of digital assets across borders. Whilst maybe lacking a ‘wow-factor’, this is important because its evidence that arguably blockchain’s biggest contenders i.e. governments that represent the highest level of centralization in a public sphere, are experimenting with new forms of process that may as well lead a happy compromise of standards that allow this new technology to really take hold.
The second trend is within the retail sector where we see a growing number of ‘loyalties and rewards programs’ as well as tracking and provenance of goods. Whilst I’m not the biggest fan of existing efforts on discounted rates within loyalty programs and shoving rewards tokens down people’s faces, I do think this is the right sector to focus attention on purely due to the market segment they’re trying to target: normal people. This technology’s success is going to be dependent on the number and quality of consumers who are using it (whether they know they are or not) and, therefore, listening to their concerns and validating your business ideas and assumptions with them is key.
Whilst I have no intention on harping on about blockchain’s scalability and interoperability issues (I will in a future post) I do want to make the point that technical limitations are one of enterprise’s biggest concerns with the technology at present. Having spent years nurturing their respective customer base, the last thing they want to do is distill confidence in their brand by peddling out a product that crashes every hour due to lack of mining power, or threatening their security because the consensus mechanism of their platform is being gamed. In order for traction to build, confidence needs to be built in the actual performance of the infrastructure itself. Right now this is being attempted, ironically, in siloed verticals where we see hundreds of different blockchain platforms being built, some prioritising scalability over security, some vice-versa and some with other trade-offs.
The solution that therefore consequently needs to be built is one of interoperability. If these platforms can’t speak to one another and transact in a clear and easy way then you are closing your product off from the very thing blockchain is trying to help propagate: network effects. Some enterprises have taken notice of this and are building out innovative ways to solve it. Take Accenture for example who recently announced the successful testing of their ‘interoperability node’ which allows the 4 most used enterprise blockchain platforms (Quorum, Hyperledger Fabric, R3 Corda and Digital Asset) to communicate with each other.
Aside from some of the technical restrictions, challenges can arise from the organizations themselves. For example, entities that have built out PoCs in-house often find it harder to convince other players (quite often their competitors) to join the platform. Why? Usually due to myriad different reasons that extend from basic arguments over IP / ownership rights all the way to simple killing off of competition. Better industry-wide standards and widening understanding of how blockchain can empower each entity through cooperation is key right now in order for enterprises to truly benefit.
My overall sentiment of the enterprise blockchain space is still one of positivity. Through exploring, questioning and working with many enterprises within these industries 2 things remain quite clear:
As we move into 2019 the projects to keep an eye out for are those focused on supply chain, securities, remittance, identity, and settlement. Whilst none of these may sound like the most tantalising scenarios for a disruptive new technology, I think the developments in these areas over the next 6 months are going to be paramount in paving the way to larger consumer adoption for blockchain.