Point of View

The Blockchain Reality Check: Where Are We and What Can We Expect in 2018?

January 2, 2018

We’ve now had a couple of years to ruminate about the emergence and impact of the blockchain—So where is the industry today and what can we expect for 2018 and beyond?

 

Distributed Ledger Technologies (DLT), including blockchain, promise to change fundamentally business models and are potentially as significant as the impact of the internet itself. 2017 was the year of the cryptocurrencies, during which we saw Bitcoin surge past $20,000 (albeit briefly!). 2018 promises to be an even more exciting year when we could see blockchain in action to solve real-world business problems. The hype has been backed up with investment, and nothing drives interest in a market better then rampart valuations and massive economic benefits of new technologies that are already in play and are real.

 

The recently released 2017 Enterprise Blockchain Services Blueprint investigates the blockchain space to provide a comprehensive and foundational analysis of the blockchain solutions and services market for enterprises. Our research establishes the disruptive potential that blockchain brings forth but also highlights the challenges that the ecosystem faces in order to realize its true potential. Consequently, HfS recognizes blockchain as a Horizon 3 change agent for digital operations—with significant value potential but still nascent for mainstream enterprise adoption.

 

This PoV assesses the challenges that pioneering enterprises face and highlights several initiatives underway to manage these. We have based our assessment on approximately 200 blockchain engagements, as well as recent conversations with six senior enterprise leaders that are trying to make an impact. The enterprises chose to remain anonymous to maintain the confidentiality of their blockchain initiatives.

 

Introducing the Blockchain Six-Pack

 

There are six built-in features of blockchains that manifest into a disruptive potential over the long run for enterprises when leveraged intelligently in relevant business use-cases. The “Blockchain Six-Pack” is changing the way we think about business transactions, data storage, and even industry value chains and associated revenue models.

  • Distributed shared data over peer-to-peer (P2P) network reduces single points of failure. The most fundamental difference between DLT and the way we store data today is that distributed ledgers do not have a central administrator. A distributed ledger is replicated, shared, and synchronized digital data geographically spread across multiple sites, countries, or institutions. This allows information to be available across the network in a fully transparent and autonomous way, reducing single points of failure and enabling far better collaboration.
  • Consensus-driven trust cuts out the middle-man. In blockchains, there is no need to trust the middle-man as you don’t have one. Trust is driven by consensus algorithms such as proof-of-work (PoW) or proof-of-stake (PoS) or some variation of these. As a result, we don’t need to worry about unreliable, inaccurate, dishonest, or overpriced intermediaries.
  • Immutable transactions ensure trust. Each block in a blockchain contains a timestamp and a link to a previous block. By definition, blockchains are inherently resistant to modification of the data. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks and a collusion of the network majority creating a single source of truth.
  • Hashing-based data ensures integrity and security. All records are individually encrypted. Blockchains use cryptographic hash codes to verify data that drives up integrity and creates strong resilience to cyber-security concerns.
  • Automated smart contracts promote touchless interactions across process chains. Several blockchains also offer ‘smart contract’ functionality. These are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that obviate the need for a contractual clause. This allows contracts to auto-execute based on pre-set conditions or triggers and allows for much higher levels of straight-through processing. It can even allow the millions of IoT devices to work autonomously.
  • Permissioned and permission-less flavors give enterprise users flexibility. Much like public and private clouds, blockchains can be private (permissioned), public (permission-less), or somewhere in between (hybrid). These flavors give enterprises the flexibility to choose their solution based on their needs and preferences. Permissioned blockchains enhance privacy and take less computational power (so have higher throughput) but lack the utopian trust that permissionless blockchains, such as Bitcoin, can bring.

Note that DLT, blockchains, and smart contracts are colloquially used synonymously. They are inter-related but are different, and it is essential to understand that not all distributed ledgers are blockchains and not all blockchains support smart contracts (see Exhibit 1).

 

Exhibit 1: Distributed ledgers, blockchain, and smart contracts are interrelated but different

 Source: HfS Research, 2017

Leaving the technicalities aside, Blockchain’s inherent features give it the potential to drive new touchless business models and disrupt existing ones by removing the need for intermediaries in the long-run. This results in significant increases in the speed, security, and reliability of executive processes, transactions, and interactions on both micro and macro scales. The potential is enormous, provided blockchains are adopted, sensibly regulated, and executed effectively.

 

However, HfS expects a five- to seven-year horizon for blockchain to fully deliver, given the nascency of the technology and associated challenges. Also, media hype and fake news, negative activity from threatened legacy stakeholders, and other economic impacts could impede adoption.

 

We had two primary goals for our PoC. 1) Is it secure enough? We deliberately tried to hack and some blocks showed that it has been hacked, but the whole system kept running. They cannot change or forge the data; 2) Was it functional? It was. We made a hypothetical bill of lading and letter of credit and created hypothetical stakeholders and tried to see if they could access the data that they need to access, and a complete stranger could not access it…and now to get live, we have to get other parties. We are just one piece of the puzzle. Everything has to be on blockchain data for this to be useful…so we need more parties involved.”

—Marine insurance executive

 

In the near term, we do expect blockchain initiatives to drive significant business impact and create a frenzy of excitement as ambitious businesses jump on the potential of new technology developments like never before. Use cases around traceability through provenance and asset tracking, digitization of contracts leading to faster settlements, management of private data, and digital identity will drive significant efficiency and effectiveness gains in existing business models. Blockchain can also become a source of competitive differentiation in the medium term by re-imagining IT infrastructure that is shared and decentralized, re-defining transaction management that is transparent and immutable, and driving additional trust in multi-party collaboration.

 

Enterprise Blockchain Adoption Is Going Through a “90-9-1” Adoption Challenge

 

The market is witnessing an explosion in blockchain proof-of-concepts (PoCs) and pilots, but in-production solutions are few and far between. We call this the “90-9-1” enterprise blockchain adoption challenge (See Exhibit 2).

 

Exhibit 2: The 90-9-1 Enterprise Blockchain Adoption Challenge 

Source: HfS Research, 2017

  • 90% of enterprises: What are blockchain and its business case? Most enterprises are trying to internalize the concept of blockchain and its relevant impact on their business. Also, the recent market excitement around cryptocurrencies is encouraging many enterprise leaders to look more closely at blockchain. Given the overall nascence of blockchain solutions, enterprises lack the understanding of distributed ledger technologies and its use cases. The lack of success stories in the market also makes internal stakeholder buy-in challenging who are almost always associating blockchain with the threat of disruption and want to stay away from it versus embrace it. Finally, it becomes hard to quantify the benefits (ROI) and to develop a total cost of ownership (TCO) model.
The key challenge is to select right blockchain platform…the future scale-up and additional feature addition are very much platform dependent”

— Financial services executive leveraging blockchain for trade settlements

 

The creation of consortium is a big challenge. It is a consortium of organizations, but who gets the infrastructure, how do we ensure that the driver stays away from pure profit motives, and how do we ensure that we are collectively close to the end-customer or the business outcome?”

– P&C insurance industry leader

  

  • 9% of enterprises: How do we get started? Some enterprises that identified relevant use cases are struggling to determine the starting point for their PoCs and pilots. Lack of maturity of the blockchain platforms and the multitude of frameworks (Ethereum, Hyperledger Fabric, R3 Corda, Ripple, Quorum, Multichain, etc.) create lack of clarity on the required technical architecture. Much like the private versus public cloud debate, there is a tough decision around permissioned or permissionless blockchain as well as the associated security and privacy concerns. Also, given many blockchain use-cases revolve around transforming a value-chain involving multiple organizations and stakeholders, consortiums are required to come with their own set of challenges around setting-up, decision rights, and ongoing management and governance. Also, most enterprises are being sidetracked by experimenting with the emerging use of AI, automation technologies, and the added headache of figuring our blockchain places a strain on already stretched IT departments. However, the broad potential of blockchain in a genuinely impactful digital business context is already driving some organizations to place blockchain at the front of the innovation queue.
  • 1% of enterprises: How do we make it real? The few enterprises that do have successful pilots are challenged with scalability to a production-grade environment. There are uncertainty and a lack of formal regulations as well as no market standards leading to interoperability issues. Most blockchains also are still trying to work through the latency or throughput issues in a production enterprise environment. Blockchain talent is hard to find and last, but not the least, integration with legacy technologies and service support for blockchain solutions remains mostly undefined.
We completed the project, test-bed was set-up successfully but throughput was much lower than expected because of Ethereum’s lack of maturity. Non-functional performance was also lower than expected.”

— IT infrastructure player on blockchain pilot experience

 

Our study of approximately 200 blockchain engagements reveals an explosion in PoCs and pilots. We have seen only a handful of these pilots progress to production, though most of these engagements at this stage are parallel or shadow production environments, where legacy environments have not been completely replaced. But we are hopeful that this is about to change given the notable market developments in 2017:

 

  • Innovations in solving latency and throughput issues. Bitcoin records about seven transactions per minute compared to 2,000 transactions per second that Visa can process. This is because Bitcoin is based on the PoW consensus mechanism that requires a tremendous amount of computational effort. But not all blockchains are based on PoW, and other consensus algorithms, like PoS, are faster. Also, Next Generation protocols are emerging that allow for much faster processing. For instance, Waves-NG (that raised $16 million in 2016 through an ICO) is set to become the fastest blockchain. Computation power has always driven emerging business models and technologies (such as gene sequencing and analytics), and blockchain is no exception when you consider the levels of investment being injected into its development.
  • Production-ready environments are emerging. Earlier this year, Hyperledger Fabric announced version 1.0, its enterprise-level production-ready environment (Read more in our interview with Brian Behlendorf, the executive director of the Hyperledger). IBM launched its enterprise-ready Blockchain Platform in 2017; it is designed to accelerate development as well as manage and govern multi-institution blockchain solutions. Oracle also announced its Blockchain Cloud Service in 2017 as a part of its Oracle Cloud Platform; it promises enterprise-grade resiliency, scalability, and security.
  • Market regulators might not have finalized rules of engagement, but they have moved beyond just a basic discussion. While Trump and Brexit dominated the news, 2017 was a busy and reasonably productive year regarding blockchain regulatory action and most of it was neutral to positive. Australia started to treat Bitcoin as money. The EU is already taking a positive stance on innovation through blockchain and expanded its efforts to support more DLT projects in 2017. LedgerX became the first federally regulated digital currency options exchange in the US. At least eight US states (Arizona, California, Hawaii, Illinois, Maine, Nevada, North Dakota, and Vermont) passed DLT related legislation.
  • Initiatives around developing standards are underway. ISO/TC 307 refers to the ISO initiative that started in 2016 and continued in 2017 to develop standards for blockchain and DLT. It is a global initiative with 29 participating countries and 13 observing countries developing four standards around terminology and concepts, personally identifiable information (PII), security risks and vulnerabilities, and identity overview. The Blockchain Interoperability Alliance was also created in November 2017 to collaborate on researching interchain transactions and communications.
  • Leading solution providers, blockchain consortia, and academic institutions are partnering with each other to create a progressive ecosystem. As a part of our blockchain research, we surveyed over 20 leading blockchain solution providers. Developing ecosystems through partnerships with technology providers, start-ups, consortiums, academicians, regulators, and legal firms is among the top priorities for most players. The Enterprise Ethereum Alliance (EEA) reached 200 members in October 2017 with the vision to be an open-source standard and address enterprise deployment requirements. Hyperledger also recruited 183 diverse organizations to back Linux Foundation’s open blockchain consortium. A committed and progressive blockchain ecosystem is emerging (see Exhibit 3).

 

Exhibit 3: The Emerging Blockchain Ecosystem

Note: The list of providers included in the exhibit is illustrative and is not comprehensive

Source: HfS Research, 2017

 

Bottom Line: 2018 Is Poised to Become a Year When Enterprise Blockchains Start Making a Real Impact. Get Out of the 90% Box!

 

We might not see the true disruptive potential of blockchains over the next 12 to 18 months, but we will see it become much more than a conversation topic with several use-cases that are generating tremendous business value for its constituents. And let’s not discount the levels of hype that tend to drive our industry in new directions, especially when the technology works. While digital, AI, and automation have been the flavors of 2017, blockchain is gearing up to lead the hype in 2018, as enterprise leaders search for new levels of value that have genuine, proven business applications.

 

So don’t sit back and assume that the world is not changing. If you are hanging out with the 90%, avoid the “Oh crap! I wish…” moment and go ahead and investigate blockchain, because very soon this funnel is going to flip!

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