The ‘revolutionary,’ ‘change the world’ promise of decentralized, permissionless blockchain solutions (including most cryptocurrencies) may be descending into a quagmire of get-rich-quick schemes, scams, and organized crime activity, but blockchain as a whole is not dead yet.
What remains above the waterline: a quieter hotbed of innovation we call ‘enterprise blockchain.’ As opposed to their problematic crypto cousins, enterprise blockchain solutions are largely permissioned and centralized – thus potentially making them safe for corporate use.
These two trends are so different, in fact, that we shouldn’t lump them together under any moniker, let alone one as overhyped as ‘blockchain.’
And yet, the differences aren’t quite in the night-and-day category. Even though enterprise blockchain has an unquestionable business focus, it is still too early to tell which enterprise blockchain approaches will become viable long-term.
Protocols, Mechanisms, and Architectures: You Pays Your Money, You Takes Your Chances
People like to compare today’s emergence of blockchain to the early days of the commercial Internet. However, this is a poor comparison, as the Internet’s early success depended on broad acceptance of basic protocols like TCP/IP, and for the Web, HTTP and HTML.
Blockchain has no such acceptance. Not only are there no meaningful protocol standards in the works, but there isn’t even any agreement on the best mechanisms for making blockchain work at all.
Consensus mechanisms are the best example of this problem. Bitcoin uses the ‘proof of work’ mechanism which enables the transaction processing nodes (aka ‘miners’) to battle for a reward – but ends up consuming impractically vast quantities of electricity.
In response, enterprise blockchain innovators have developed numerous alternative consensus mechanisms, each with its own strengths and weaknesses – and generally, none are interoperable with any of the others.
The Confusion over Decentralization
Ask your average crypto fanatic what makes their coin of choice so revolutionary, and they are likely to tout crypto’s decentralization. What they are referring to is the lack of a centralized decision-making authority. In essence, with any decentralized blockchain-based solution, no one is in control.
With centralized, permissioned blockchain, in contrast, some company or consortium of companies controls who gets to process transactions, what rules they have to follow, and also establishes some way of coming to an agreement on any changes to the blockchain technology itself.
Decentralized, however, is different from distributed. The notion of distributed applies to architectures, not decision-making policies. In fact, distributed architectures have been with us since the 1990s, as they were essential for building highly scalable Web sites like eBay EBAY +1% and Yahoo! back in the day. Today, all cloud architectures are inherently distributed.
When you boil blockchain down to its basics, you end up with a secure distributed ledger – that is, a database with multiple nodes in different places, with a secure mechanism to ensure all the nodes are sufficiently in agreement with each other. Decentralization, in fact, isn’t part of the blockchain equation at all.
Distributed Ledgers in Action
Such distributed ledgers are, in fact, hardly revolutionary. They are a useful innovation for handling a certain class of multiparty transactions – and such transactions are generally the focus of today’s emerging blockchain solutions.
I’ve covered a few enterprise blockchain startups with novel approaches to multiparty transactions before. Gospel Technology, for example, provides exceptionally granular security for data in such transactions (featured in this article).
Boardwalktech emphasizes granular transaction chaining, keeping track of each field in a complex transaction. And Interbit from BTL treats individual blockchains as virtual machines and is thus able to spawn vast numbers of ephemeral blockchains to keep track of individual transactions (the latter two featured in this article).
Some distributed ledgers coming to market may not even be blockchains, as they don’t chain blocks (not that such a distinction really matters). One example: Corda from R3, which only shares transaction data among the nodes participating in a transaction. R3 is also following an open source strategy, offering a free alternative and a paid, enterprise version that adds additional capabilities like enterprise database support, better security, and higher availability.
Incumbent software vendors are getting into the game as well. IBM IBM -0.64%has been heavily investing in Hyperledger, an open source permissioned blockchain initiative out of the Linux Foundation. For IBM, blockchain is more of a professional services play than a product offering, consistent with its long-term enterprise strategy.
Nevertheless, IBM deserves kudos for innovating ahead of clear market demand. “We didn’t start with a big bang,” says Marie Wieck, the general manager of IBM Blockchain. “We had to create something new, so we started experimenting and doing some customer pilots, and we saw there was enough interest to move forward.”
SAP is also following in IBM’s footsteps with the launch of the SAP Cloud Platform Blockchain. This ‘blockchain-as-a-service’ offering focuses on Internet of Things, manufacturing, and supply chain solutions, and leverages Hyperledger as well as MultiChain, another open source blockchain effort that focuses on private chains, much as Corda does.
The Token Pitfall
IBM is also rolling out its new Blockchain World Wire (BWW) cross-border payment network, looking to facilitate international payment settlements that use multiple currencies.
As many permissionless blockchain international payment processing wannabes have discovered, one of the primary challenges of an international payments business model is representing the value of the transaction in terms of a cryptocurrency or other cryptotoken.
There are, in fact, many problems with such tokens. In addition to the crime-related shortcomings of cryptocurrencies, tokens that blockchain businesses issue themselves have their own drawbacks as well. In general, the value of such tokens is merely speculative.
Since initial coin offering (ICO) speculators as well as founders of ICO-funded startups end up possessing large numbers of such tokens, it is unlikely their market value will ever rise to the point of fostering a working token economy, where buyers and sellers of such tokens drive an equilibrium in the market separate from speculative interest in the tokens.
BWW isn’t making this mistake. In the case of BWW, IBM is working with Stellar, a payment technology built upon the Ripple protocol. Ripple is yet another permissioned blockchain play, in this case focused on international financial transactions. However, while Ripple’s tokens’ market value is subject to the whims of speculators, the Stellar tokens supporting BWW are ‘stablecoins,’ that is, tokens with a fixed fiat value.
Stablecoins address the problem of speculators and founders dumping their tokens to depress a token economy, but they are really little more than stand-ins for fiat currencies – and we’ve been dealing with stand-ins for fiat since the first bank issued its own notes.
On the other hand, there are enterprise blockchain platform providers that offer tokens on the open market. SophiaTX from Equidato provides a platform for building third-party blockchain solutions with a particular strength in enterprise integration, and DECENT offers a similar platform, with tokens intended to foster an ecosystem of third-party solutions on the platform, thus building an economy providing token value beyond what a single service provider could accomplish on its own – at least in theory.
The challenge both SophiaTX and DECENT have, however, is that speculative interest drives the value of their respective tokens. Such interest puts money in their pockets via ICOs to be sure, but now presents an impediment to long-term token economy success that neither vendor knows how to resolve.
Enterprise Blockchain’s Long-Term Prospects
This article only scratches the surface of today’s enterprise blockchain initiatives – but it hopefully indicates the diversity of such efforts in terms of their technical approaches as well as their business models.
Such diversity, however, cuts both ways. The wild west-style explosion mechanisms and architectures only shows the level of overall immaturity in the space. We can expect to see a consolidation to a small handful of such technical approaches, once the market figures out which ones work and which ones do not.
In terms of business models, furthermore, the diversity is perhaps smaller than the hype around blockchain might suggest.
True, coming up with better ways of handling complex multiparty transactions is bound to lead to a vibrant market category over time. But that single market category appears to be the full extent of blockchain’s true business value.
Blockchain fanatics around the world refuse to believe it, but the long-term opportunity for blockchain falls well short of Internet-level disruption that would indicate that this technology is anything close to revolutionary.