Blockchain’s Occam
problem PART II
A future for blockchain?
Given the lack of
convincing at-scale use cases and the industry’s seemingly becalmed position in
the industry lifecycle, there are reasonable questions to ask about blockchain’s
future. Is it really going to revolutionize transaction processing and lead to
material cost reductions and efficiency gains? Are there benefits to be accrued
that justify the changes required in market infrastructure and data governance?
Or is a secure distributed ledger primarily just one option when contemplating
possible replacements for legacy infrastructure?
Certainly, there is a
growing sense that blockchain is a poorly understood (and somewhat clunky)
solution in search of a problem. The perspective is exacerbated by short-term
expense pressures, cultural resistance in some quarters (blockchains may
threaten jobs), and concern over disruption to healthy revenue streams. There
are challenges in respect of governance—making decisions in a decentralized
environment is never easy, especially when accountability is equally
decentralized. And there are technical impediments, for example in respect to
blockchains’ data storage capacity.
It’s estimated there
will be over 20 billion connected devices by 2020, all of which will require
management, storage, and retrieval of data. However, today’s blockchains are
ineffective data receptacles, because every node on a typical network must
process every transaction and maintain a copy of the entire state. The result
is that the number of transactions cannot exceed the limit of any single node.
And blockchains get less responsive as more nodes are added, due to latency
issues.
Finally, there are
security concerns. In smaller networks where validation relies on a majority
vote there is manifest potential for fraud (the so-called “51 percent
problem”). Another potential security challenge arises from advances in quantum
computing. Google said in 2016 its quantum prototype was 10 million times
faster than any computer in its lab. That raises the possibility that quantum
computers will be able to hack codes used to authorize cryptocurrency
transactions; a particularly troubling threat for a network that claims to be
fraud resistant.
Still, all is not lost.
It’s likely that many of the validation protocols used today will be upgraded
or replaced in the next two to three years, and innovators are already finding
solutions. Cardano, for example, is a so-called third-generation technology and
the industry’s first platform to leverage peer-reviewed open source code. The
protocol is designed to be quantum-computing resistant. Private blockchains,
meanwhile, are being built to give network members control over who can read
the ledger and how nodes are connected.
In addition, there have
been some promising advances in use cases, particularly away from the financial
industry. Recent experiments in supply chains, identity management, and sharing
of public records have been positive. We have seen grocery stores target customers
with blockchain-enabled products and services, and shipping executives launch a
new real-time registry of containers underpinned by blockchain.
An emerging perspective
is that the application of blockchain can be most valuable when it democratizes
data access, enables collaboration, and solves specific pain points. Certainly,
it brings benefits where it shifts ownership from corporations to consumers,
sharing “proof” of supply-chain provenance more vertically, and enabling
transparency and automation. Our suspicion is that it will be these species of
uses cases, rather than those in financial services, that will eventually
demonstrate the most value.
Moving through the cycle: Three key principles
There is no guarantee
that any blockchain application will make a sustained move to the second stage
in the industry lifecycle. To do so will require a strong rationale,
significant capital, and increased standardization. Fintech leaders will need
to take a more nuanced view of their target industries and hire the right
talent. However, where there is potential to address pain points at scale, the
opportunity remains in place.
To get there we see
three key principles as minimum conditions for progress:
·
Organizations must
start with a problem. Unless there is a valid problem or pain point, blockchain
likely won’t be a practical solution. Also, Occam’s razor applies—it must be
the simplest solution available. Firms must honestly evaluate their risk-reward
appetite, level of education, and potential gain. They should also assess the
potential impact of any project and supporting business case.
·
There must be a clear
business case and target ROI: Organizations must identify a rationale for
investment that reflects their market position and which is supported at board
level and by employees, without fear of cannibalization. Companies should pragmatically
consider their power to shape ecosystems, establish standards, and address
regulatory hurdles, all of which will inform their strategic approach.
Blockchain’s value comes from its network effects, so a majority of
stakeholders must be aligned. There must be a governance agreement covering
participation, ownership, maintenance, compliance, and data standards. Finance
arrangements must be agreed in advance so that sufficient funding through to
commercial launch is guaranteed.
·
Companies must agree to
a mandate and commit to a path to adoption. Once a use case is selected,
companies must assess their ability to deliver. Sufficient economic and
technological support is essential. If they pass those hurdles, the next stage
is to launch a design process and gather elements including the core blockchain
platform and hardware. They must then set performance targets (transaction
volume and velocity). In parallel, companies should put in place the necessary
organizational frameworks, including working groups and communications
protocols, so that development, configuration, integration, production, and
marketing (to drive adoption at scale) are sufficiently supported.
Conceptually,
blockchain has the potential to revolutionize business processes in industries
from banking and insurance to shipping and healthcare. Still, the technology
has not yet seen a significant application at scale, and it faces structural
challenges, including resolving the innovator’s dilemma. Some industries are
already downgrading their expectations (vendors have a role to play there), and
we expect further “doses of realism” as experimentation continues.
Companies set on taking
blockchain forward must adapt their strategic playbooks, honestly review the
advantages over more conventional solutions, and embrace a more hard-headed
commercial approach. They should be quick to abandon applications where there
is no incremental value. In many industries, the necessary collaboration may
best be undertaken with reference to the ecosystems starting to reshape digital
commerce. If they can do all that, and be patient, blockchain may still emerge
as Occam’s right answer.
By Matt Higginson, Marie-Claude
Nadeau, and Kausik Rajgopal
https://www.mckinsey.com/industries/financial-services/our-insights/blockchains-occam-problem.?cid=other-eml-alt-mip-mck&hlkid=9f09737f325e4674836f3a01887bcd87&hctky=1627601&hdpid=95e9bdfa-0709-4b4d-8252-f401bcaac86d
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