Blockchain peaks on the hype cycle

McKinsey recently released a new report that concluded that “evidence for a practical scalable use for blockchain is thin on the ground”. While the report primarily covers financial services, this report is still a significant departure from the May 2016 McKinsey article titled “How blockchains could change the world”.

I suppose it should not come as a surprise that Blockchain has peaked on the hype cycle. Given the euphoria that greeted the emergence of the technology — with cryptocurrencies being called an “asset class” and blockchain being applied to all manner of industries and use cases — it was only natural to expect disappointment to follow.

I have been cautious about the true value of blockchain technology. Over the past year, and having looked at hundreds of companies in this space, the case for caution has driven by two factors.

First, a lot of companies have simply been offering slideware, often adopting blockchains in their business plans simply to raise valuations. Some even went to great lengths to reposition as “peer-to-peer platforms” for (for instance) energy trading in order to launch ICOs and to cash in on cheap money.

The second reason for caution is based on the actual limits of blockchain (or more accurately distributed ledger) technology and a serious lack of understanding of market dynamics amongst participants testing such technology. While initial hype was around “removing the middleman”, the truth is that in most value chains the “middleman” is providing a valuable service. Blockchains do not remove the need for that service or for the trusted middleman — they simply change the nature of trust. Rather than trusting institutions (such as banks), we have to trust the technology and the vendors that provide it.

The truth is that blockchains are, in essence, a distributed, slow, and untested database that is being asked to replace a tested, fast, and centralized database. This does not sound, in most cases, like a very smart upgrade. Indeed, there are very few companies I have seen that can answer the most simple of questions — can you solve the same problem without the use of blockchain technology?

This being said, there is reason to believe that appropriate applications will emerge. One area for adoption, in my view, is in logistics and supply chains. McKinsey itself has been more sanguine, but there are specific use cases that are being tested at substantial scale where an immutable database that is distributed is helpful and enables use cases that are not otherwise possible. Similarly, one is also seeing meaningful developments in security — again in securing or authenticating distributed devices, where dependence on a centralized store can limit functionality.

Blockchain technology will really solve a problem where it is removing a dependence on a centralized store where such a store may be unavailable or inaccessible. An example might be IoT edge networks that cannot always rely on connectivity to the cloud. Similarly, scenarios where multiple market participants must transact, either in parallel or sequence, and can agree to share most of that information with the other participants, may benefit from the use of a blockchain. In this later scenario, the blockchain serves as a quasi “public good” that benefits multiple parties. Those parties must consciously give up control of data — admittedly a high hurdle, but one that may be overcome if a single player (e.g. the supply chain owner) forces it or if everyone operates under a consortium.

Regardless of deployment scenario, blockchain technology is likely to see adoption where it a) integrates with other technology, particularly IoT, and b) where it is only part of a larger solution. For instance, to solve the problem of authentication at the edge of any network, one may choose to leverage blockchain on the edge, while relegating the overall network management to a more efficient central store. This is the approach implemented by Xage or UBirch.

McKinsey’s report does not herald the end of experimentation with blockchain technology. But it certainly marks the peak of the hype cycle, which had already started with the decline of the ICO market last year. With this decline will come a more realistic understanding of the technology’s limitations and potential. And hopefully, it will lead to a culling of the companies that play in this space, with solutions based more on reality and less on PowerPoint.