I often say that blockchain is one of the most complex areas, combining all we don’t know about technology with all we don’t understand about finance. It’s a big hole of acronyms, confusion and debate. Some things that claim to be blockchain don’t use blockchains, and some blockchains claim not to be blockchains but blockchain inspired. Then it gets even worse, as a whole new other market called Distributed Ledger Technology (DLT) has risen to replace blockchain, as blockchain sounds too bitcoiny. What is actually happening?
I guess the key thing here is where can you see blockchain or DLT being used in earnest? Name me one example where it is succeeding and working in reality? Sure, you can point me to many proofs of concept and trails, but there’s hardly any real world examples of blockchain and DLT working in practice.
This is because most of the uses of the technology are in areas that are far more complex than just a technology solution required. The use cases are in digital identity, clearing and settlement, trade finance and more, and these all require agreements between governments, financial institutions and corporations before the technology can be applied. It’s not a technology solution fix but an agreement fix first that then allows the technology to be applied. That’s why it’s taking so long to come to fruition and prove its value.
Maybe this is why two of the stand-out start-ups in the financial DLT space are struggling. Digital Asset Holdings (DAH), led by Blythe Masters, was a stellar company that gained lots of traction, support, finance and publicity when it launched. Almost everywhere I looked, Blythe was there talking about the blockchain revolution. Three years later, Blythe has left DAH and a spokesperson for DAH says: “The market is evolving to a place where we see the ledger platform becoming a place that is going to be very difficult for us to compete in.”
Similarly R3, the bank consortia funded and operated start-up was meant to revolutionise banking with Corda, their blockchain-inspired ledger platform. Three years later, and the leadership and developers of R3 are at war. According to The Block, engineers have lost faith in the tech, saying it lacks scalability and “doesn’t perform well”. Engineers have also complained about the five-figure monthly bills R3 has to pay for cloud services, undermining viability even further. The Block notes that this is potentially something true of all DLT and blockchain firms where there is a cultural conflict between those bringing blockchain enterprises to market and the engineers working on delivering the products being promised.
It is also interesting to consider that the 50 or so banks funding R3 are in it for near seven figure numbers annually. To have funded a consortia to the tune of millions of dollars and see no results after years must be frustrating for the banks. A former ING employee told The Block that the bank was not seeing the value creation for the money it had spent to engage in a five-year revenues agreement for an unlimited number of Corda Enterprise licenses. ING claim this is not the bank’s view but, even so …
Bloomberg reports that Germany’s central bank president Jens Weidmann found a trial project to transfer and settle securities and cash using blockchain had turned out more costly than the old-fashioned method and there are many other examples.
Finally, McKinsey makes three use cases for blockchain but none of them in the clearing and settlement space, but all of them for retail banking in the areas of remittances, know your customer (KYC) and risk scoring for the underbanked. Even then, there are the sceptics.
McKinsey is getting there little by little
They started with “blockchain the revolution” and hundreds of potential use cases, to now only 3
Soon they will realize only the first one makes sense. Full circle – back to cryptocurrencies! pic.twitter.com/yLazfU6xvF
— Sebastien Meunier (@sbmeunier) August 16, 2019
Ah well, it looked good at the time. Let’s talk about machine learning instead.ac