This article covers #blockchain, a distributed ledger #technology, its perception and the ambivalent (for now) adoption by corporate enterprises. Co-authored Converge VP investors Maia Heymann and Ash Egan.
Most Fortune 500 companies are having extensive conversations, in CIO suites or in innovation labs, on whether the blockchain technology is right for them, and their peers – discussions on how their primary business lines might be affected by the technology, current solutions, and the areas (or consortia) to invest in. Distributed ledger standardization is far from reality, and although there are promising developments in #Bitcoin adoption and corporate blockchain experimentation, it’s still not clear when (or how) enterprises will ramp-up pilots and accelerate commercial-grade adoption. Some sectors like financial services are far ahead in exploration and testing, but general skepticism and even a misunderstanding are slowing blockchain’s future as a widely-adopted disruptive technology.
After attending Consensus 2016 in NYC, and a few blockchain enthusiast dinners at MIT, it’s clear that established corporate players are exploring and investing in both forms of blockchain: permissioned and public. The Consensus conference, hosted by Coindesk was packed with #fintech executives as well as Bitcoin and blockchain vendors and voyeurs—our term for IT buyers looking and not buying. Theories and opinions regarding the direction of blockchain technology are as varied as the attendees.
A corporate IT buyer’s reticence regarding blockchain is understandable. First, it’s challenging to explain the blockchain to senior management; it is a technology that no one owns, no single party is accountable for, and it’s based everywhere and nowhere. Second, Bitcoin’s rocky road is perceived as a cautionary prelude to what could go wrong with a distributed governing body. A recent New York Times article publicized that over 70% of the transactions on the Bitcoin network were going through just four Chinese companies (data assembled by Chainalysis [1]). In short, there is apprehension around limited to zero control, or too much control in the wrong hands, for a corporate IT buyer to join an open, permission-less system.
Despite doubts around practicality, security and utility within blockchain’s open, permissionless system, start-ups, new consortia, and corporate players are advancing the technology through ‘closed’ experiments to test blockchain’s potential applicability. These early tests are being supported by venture capitalists globally, and Olga Kharif says $1.1B has been invested to date in startups commercializing blockchain in “Blockchain Goes Beyond Crypto-Currency”.
Corporate business use-cases have the potential to generate improved margins and provide customer/client benefits in transaction-based industries: peer-to-peer payments, identity management, cross-boarder trade, and solutions within commercial payments and finance. One large insurance firm commented: “Broadly, the use-cases of Blockchain in transaction processing are most likely to be implemented early across the industry – the range of solutions that exist today are quite rich, from faster international transfers to more efficient settlements on exchanges, this is the area that appears to be the most promising in the near term.”
Backing-Up, What Is Blockchain? Bitcoin to Blockchain
Blockchain, born out of Satoshi Nakamoto’s 2008 whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System” is a distributed database, a decentralized and shared public ledger of time-stamped transactions within a network, open for review by anyone within the network. “The Business Blockchain” by William Mougayer uses a three prong approach to defining the blockchain: technical: back-end database that maintains a distributed ledger, openly; business: exchange network for moving value between peers; legal: a transaction validation mechanism, not requiring intermediary assistance (pg 4).
Bitcoin, powered by the blockchain, is a virtual crypto-currency allowing peer-to-peer payments for network members – becoming the first manifestation and widespread adoption of the technology. The crypto-currency began as an open source project, and requires the network to confirm transactions – a key component of its decentralized nature. Currently, Bitcoin is maintained by a small group of developers called theBitcoin core. This group is responsible for pushing updates and progressing the network, while Bitcoin network members (miners) power transactions.
Each participant (or node) puts the transactions into blocks and blocks into a single chain, and stores a complete record (or ‘proof’ system), protecting the integrity and veracity of all transactions in the chain. The system is anonymous, and through its mathematical proofing system eliminates the need for an intermediary or for third-party verification. The network resolves the conflicts so all nodes have the exact same copy of the distributed ledger. The collective effort of Bitcoin’s network made up of computers and servers all over the world, provides the compute power.
While millions of Bitcoin transactions have occurred (surpassing $10B in market value), corporations and financial institutions remain skeptical due to the absence of regulation, the perception of proximity to criminal activity, a slow moving ‘governing’ body from Bitcoin core, and the concentration of power and control of miners (presently with four Chinese companies). These issues among others compound to call into question Bitcoin’s independence and decentralization. The skepticism, however, is evolving into recognition of the underlying technology’s potential, and as Goldman Sachs’ Robert Boroujerdi said, “Bitcoin was just the opening act.”
In line with Boroujerdi’s comments, William Mougayar points to the blockchain technology, as being as innovative as the Internet in ‘The Business Blockchain’: “the blockchain is part of the history of the Internet. It is at the same level as the World Wide Web in terms of importance and arguably might give us back the Internet, in the way it was supposed to be: more decentralized, more open, more secure, more private, more equitable, and more accessible”.
Why The #Enterprise Cares About Blockchain
Disruption. FOMO (fear of missing out).
Applications of blockchain technology include (but are certainly not limited to) stock issuance, provenance, smart contracts, streamlining of loan underwriting, and payment transfers. Many industries will be impacted by both private distributed ledgers and crpytocurrency — agriculture, insurance, financial services, and even entertainment—almost all industries could find use-cases for the adoption of blockchain technology.
As mentioned earlier, financial services companies are far ahead in exploration and testing blockchain technology. What became apparent via multiple conversations at Consensus 2016 is many corporates are exploring blockchain for fear of missing out (FOMO). Enterprises are opportunistically exploring and experimenting with side projects (via pilots), simultaneously suspect of relinquishing control and fearful of losing revenue associated with their intermediary or third-party verification business lines. As upstarts and even competitors adopt the technology and attest to its financial efficacy and cross-departmental value, the lure of not being left behind is strong. We’re seeing corporate buyers framing why and how the blockchain can theoretically and practically serve their companies’ needs. One large institution on the east coast said, “we are pursuing multiple ways to understand and leverage the technology – for instance [our] Ventures team looks at startups that leverage Blockchain and other cutting edge technologies. We are exploring multiple fronts in a coordinated manner.”
The extent to which crypto-currency, public blockchain, and private blockchain applications are accepted and scaled by corporates remains unclear, but the signals are encouraging. A report from Santander anticipates cost savings up to $20B annually by 2022.
Balancing Risk with Potential
It’s no walk in the park to replace current infrastructure (mainframes), with a new system, whether that is blockchain or an alternative. The headache of adopting blockchain technology and connecting to legacy systems is not to be underestimated. Beyond understanding the potential cost savings of using blockchain’s system, buyers need to include the cost of migration in their calculus – evidence of this expense are the consulting firms who have set up entire blockchain practices. The Rubix Team at Deloitte, offers a “one stop blockchain software platform” and is an example of consultants being at-the-ready to contract with their clients to re-architect legacy technology and processes.
For all of blockchain’s benefits, corporations are aware of the risks of Bitcoin and blockchain technology: a limited governing body; powerful and growing Chinese mining presence; executing transactions at scale in a decentralized manner; inherent security risks from new technology; the rise of hackers targeting sensitive data; and growing pain risks like the recent attack on The DAO. Government regulation will provide both challenges and benefits for corporations. As is often the case with new technologies in regulated industries, the regulatory agencies have to catch-up. The United States’ regulatory bodies are learning, and their stance on permission-less distributed ledgers (like Bitcoin) it is not yet clear. For instance, the Office of Foreign Asset Controls (OFAC) and Financial Crimes Enforcement Network (FinCEN) have the right to blacklist companies interacting with cryptocurrencies (Coincenter). Jamie Smith of BitFury commented at Consensus 2016 that engaging with regulators is necessary and even advised because “the regulators can either help you or hurt you” with respect to crypto-currency and blockchain adoption.
Despite the risks, blockchain technology has the potential to radically change countless industries and give rise to new ones. Indeed, this technology is evolving from the obscure framework behind a crypto-currency to the newest technological frontier, and we are excited to continue to watch and see how corporates invest, participate, and innovate the world as we know it.
[linkedinbadge URL=”https://www.linkedin.com/in/maiaheymann” connections=”off” mode=”icon” liname=”Maia Heymann“] is Investor at Converge Venture Partners, an enterprise focused early-stage tech VC with investments in Chainalysis, Podium Data, SmartVid.io, Talla, Wade & Wendy and other emerging technology companies.
[1] Chainalysis is a Converge VP investment.
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