Shorting on blockchain predictions (2018)

The article below was written in august 2018 and published in the Shift’19 report, accompanying the amazing Shift! events from In The Pocket. I was asked to share my predictions on blockchain in the short term. Contrary to most crypto-advisers, I love to be confronted with early predictions to see whether or not I can handle Amara’s Law.

This Law states that human linear thinking is in conflict with the exponential changes of today. Simply said : we’re too excited when something new appears to understand adoption takes time. We’re too blind to see the exponential change when adoption happened. In his own words: “we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” Let’s see.

TL;DR

With 2017 clearly being the year of “the Initial Coin/Token Offering” (ICO/ITO), 2018 seems to be a year in which the cryptocurrency scene more and more snuggles up to the traditional financial sector.

With regards to blockchain technology, the Gartner Hype Cycle is harvesting a fair amount of pointless blockchain projects as the “trough of disillusionment” comes near. From 2019 on, serious blockchain based enterprise level projects are going live for the large public (more specific: companies trading internationally).

Crypto

Satoshi Nakamoto, the still unknown genius behind the bitcoin, wrote a whitepaper in 2007–2008 to torn apart the banking world. Some 10 years later, it requires a blindfolded bitcoin maximalist to still second this foretold disruption.

The crypto ecosystem, now bulging with real hard cash, seeks a way out of the trenches, into the mainstream financial world. Of course, some startups still love to disrupt everything but let’s be honest, the entire token market is an incrowd led Ponzi scheme aimed to separate fools and their money [1].

The challenge is more or less alike to the what the mob faces: how to become “salonfähig”? Money of course buys a lot: (former) members of regulators, of government, of financial institutions board shady organizations to give them some sort of credibility.

Crypto issuers go a long way to add insurance, additional security, implement anti-money laundry laws, even add “know your customer” screens to look like the once so hated and spit upon financial world. With 9 ETF’s on the table of the American regulator, crypto based futures will make it one day in 2019.

To involve a greater audience, the focus must shift from making money to making happy customers. The most recent payment apps and cards make quantum leaps on that account. Onboarding becomes user friendly and PSD2 will open up the traditional banking world. If the customer can be seduced with a smooth financial experience (payment, remittance, loans, insurance, investments) in a regulated environment — then shift will happen.

The current landslide in attitude from (serious) crypto based organisations is so remarkable, I assume a broader acceptance and even regular use of crypto tokens will pop up in 2019. For a long time already, the financial world pleas for “same business, same rules”. Once it’s there, it’s time to stop nitpicking and to start a constructive dialogue to explain the rules of the financial game.

Blockchain

Within the financial world, there is a general cooldown with regards to blockchain projects. Return on Investment is realised only years later, some experiments were simply to experimental or did not match with the strategy. It’s easier to launch projects with immediate customer value or visible results. Blockchain still sounds too promising.

Nevertheless, the ripple once created by bitcoin is still widening: other industries, especially those with long supply chains, are eyeing this brand new technology for other than financial uses. Just like bitcoin isn’t the best implementation of blockchain technology, the financial industry might not be the most fertile soil for blockchain projects. Time will tell.

And it has been a long wait in the financial sector: banks are running blockchain [2] proof of concepts and pilots since 2014. Early predictions positioned 2016 as the year projects would go live, but 2019 turns out to be a more likely bet. Several projects in Trade Finance are already running small live pilots, a move to mainstream use is foreseen end of 2018, early 2019.

The continuous push from IBM to develop and enhance Hyperledger Fabric until it’s enterprise ready, pays off. We-trade.com and Maersk both rely on IBM to get things done. We expect more Trade Finance projects to deliver in Asia (Singapore) and the United States ( R3CEV). The Trade Finance business involves a lot of parties who don’t know or trust each other, endless paper-based communication chains and a need for more supervision. A sound use case to pin a blockchain underneath the company owned application stacks.

McKinsey research, backed by our own experience, indicates that other projects with a chance on success are to be found in the domains Insurance, Financial Markets, Tokenization and Identity (in that order).

For 2019, Insurance will be the domain to focus on to bring projects live, most likely in combination with IoT. In Financial Markets, the financial institutions aim for efficiency gains by creating a new financial backend with less reconciliations. Expect to see some piloting in this area — benefits are huge but so are the burdens of rewriting these processes.

The tokenization of assets creates on the one hand a ledger of historical actions, but also the possibility of a secondary market for everything. It’s utmost promising, but the bridge between the physical world and digital assets remains a tough hurdle. Identity remains in an experimental stage, although governments or their institutions, like the EU Blockchain Laboratory but also Digipolis in Antwerp, could be an enormous catalyst in this space. One tier 1 bank is rumoured to run 7 similar projects with regards to identity for legal entities at the same time. Too hot to go live with.

A better understanding of blockchain based use cases

In 2019 two misconceptions will disappear:

• We are building “blockchain projects”;
• Blockchain replaces trust.

Let’s start with the famous “ blockchain projects”. In fact, the blockchain is but a small database layer underneath a full application stack (user interface if required, business layer, data layer, database,…). It’s estimated to add 5–10% to the coding effort. Eventually, it will be used to share the smallest set of data required to establish a shared truth between participants in the network. That’s why in 2019 we’ll realise blockchain is not disruptive, nor revolutionary (in its current stage). It enables an evolution towards ecosystems and reliable datasources.

Which brings us to the second topic: blockchain requires a lot of trust being built up between the companies involved. Trust in the robustness of the technology, in the common interest of sharing data, in the shared procedure/workflow being established,… Once this trust is established, once a central party to govern the blockchain is set up… why not centralize and forget the blockchain? The advantage however lies in the network effects, on what happens on the edges of the ecosystem. Benefits that might not be realised until 2022–2025, as Gartner predicted.

On the other hand, turning a blockchain into a single shared source of truth, requires deep technical changes: part of the master data will reside on the ledger. As offboarding is way more difficult than onboarding, blockchain is a strategic discussion.

Conclusion

With most processes already rather optimized or at least in a sufficiently working state, the question to answer in 2019 will be “why try harder?”. Trade Finance is delivering an answer, Insurance inspired projects should surface as well.

Working for years in the background to realise an eventual benefit, requires a small leap of faith. Blockchain is simply a next evolutionary step: a more efficient way to create trust in shared data, which leads to stronger ecosystems serving customer needs.

[1] DigiPulse.io, for example, noticed 98% of the tokens were used as investment and will destroy them all ( link)

[2] I refer to private permissioned blockchains: shielded from the outside world, with internal rules on who’s allowed to do what. The bitcoin blockchain is the opposite: visible and open for everyone, within the bounds of the blockchain protocol

Originally published at https://www.linkedin.com.