Blockchain, Where is the Bottleneck?

Renato Grottola, SVP & Global Director Digital Transformation and M&A, DNV Gl Business Assurance Group
Renato Grottola, SVP & Global Director Digital Transformation and M&A, DNV Gl Business Assurance Group

Renato Grottola, SVP & Global Director Digital Transformation and M&A, DNV Gl Business Assurance Group

According to a recent report from Gartner, published in August 2018, Blockchain technology is currently at the edge of the ‘trough of disillusionment’ phase in its lifecycle, although it is predicted that the technology could reach the ‘plateau of productivity’ in the upcoming ten years.

During 2018, many reports and articles have been written to highlight and list the major technical and conceptual limitations that prevent a massive adoption of this technology in real life, beyond ‘Proofs of concept’, ‘Prototypes’ and ‘Pilot applications’.

Disputes such as Public vs. Private Blockchain, Permissionless vs. Permissioned, Degree of Decentralization, and reflections on current limitations connected to consensus mechanisms, speed, scalability and security, are obviously important. However, in my opinion, these discussions are not really hitting the spot, for two main technological reasons.

First, from a technology adoption point of view, the success of blockchain is strictly connected to the real possibility to use it in combination with other emerging technologies such as Internet of Things, Big Data and Artificial Intelligence, at least. Second, I believe—or I haven’t found enough reasons to doubt—that Moore’s Law will apply to Blockchain as well. If we simply compare the current Blockchain state of the art to that of the recent past (12 months ago), we cannot deny that the technology is ‘evolving’ if not ‘continuing to show’ signs of maturity.

From a business perspective, those who are negative on Blockchain adoption are often defining this technology as a ‘solution in search of a problem’. To corroborate this statement, the classic argument is “blockchain does nothing different from what a central database can already do”. Those using this argument are missing another important spot. Why? Let me try to explain: if we use blockchain to execute transactions involving pure and native digital assets, we could look at blockchain as a cheaper and more efficient way to provide the necessary trust to the transaction itself, in the absence of any kind of Trusted Third Party. Thus, we could look at blockchain as a kind of ‘substitute product’. According to the good old Porter’s model, the threat of substitutes is one of the five forces able to redefine the industry terrain and reshape the competitive arena. Another good reason to consider Blockchain something interesting to explore.

To understand the real potential of Blockchain, we should connect it to the areas in which existing business models and operating mechanisms are not able to provide a single picture of truth for a specific transaction.

One highly relevant area is Supply Chain, a domain which has a huge impact on global GDP. In recent years, trends related to connectivity, globalization, cross trade facilitation and dematerialization of processes have significantly reshaped supply chains, increasing functional fragmentation, geographical distribution and complexity.

  ‚ÄčBlockchain massive adoption will require a new set of regulations that goes far beyond financial domain.  

Under the push of digitalization, which has undoubtfully contributed to increase efficiency and flexibility in production, the traditional Supply Chain has been mutating from a linear sequence of customer/supplier relationships—in which value was flowing linearly from producers to consumers, and information was managed by centralized systems such as ERPs—into a dynamic and ever changing ecosystem of participants, counting multiple potential points of failure at interfaces between players.

The more this mutation process evolves, the less a single player will be able to provide other participants with the necessary trust to act as a single point of governance and to give all stakeholders the single picture of truth for a given product flowing into the supply ecosystem, before reaching the final consumer.

Will Blockchain be the solution to this problem? Partially, but not fully. Why? If for example decisions regarding physical products are based on certain digital twin characteristics, we will need to be sure that the trust gap arising from the conversion of those characteristics ‘from physical to digital’ is properly filled.

So, where is the bottleneck? If the potential is so huge, why are there still claims that the ‘only real use cases in place for blockchain are crypto speculation and illegal transactions’?

The answer I can provide to readers is: lack of regulation. Or, better, lack of a different kind of regulation than the one which is today debated on financial newspapers. Should some regulator define that tokens are securities, as an example, this will not help companies adopt real life solutions. All existing regulations, and the GDPR appears to be a particularly relevant example, are embedding the ‘single point of governance’ concept. This is a broader concept than that of a ‘centralized database’. The regulation in this perspective is technology neutral but it has been developed under a specific paradigm which is not necessarily applicable to decentralized models. As another example, we can think of the regulations concerning transparency and business contracts applied to online platforms, where censorship and privacy risks are undoubtedly an issue. In blockchain platforms, such risks will have a different profile and impact compared to what is the case for centrally owned platforms, and therefore require different sets of regulations.

Things are certainly not easier when taking the view of infrastructure development and deployment. An enterprise seeking to embrace the role of a validating node in a public Blockchain, or choosing to make use of tokens to executing transactions on it, maybe as a part of a broader solution, will need days and weeks of complex discussions with lawyers in multiple fields, showing their best poker faces.

Several governments are undertaking initiatives to regulate the so called crypto world. Most of them, however, are addressing the need to regulate tokens as a new kind of asset class and to contrast illegal activities such as money laundering. This will be an incomplete solution to a broader problem, which may even fuel further disillusion. Many projects benefitting from capital raised by a perfectly working regulation in that field, will still struggle in executing initiatives, in the absence of principles and frames supporting sustainable operations and ensuring proper business continuity. A sandbox approach, in this perspective, may mitigate the obvious and expected early stage instability.

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