While much has been written about the disruptive impact of blockchain, and at a time when large companies are multiplying ‘PoCs’—Proofs of Concepts—to attempt to make sense of its disruptive potential, it is a good time to take a step back to assess the actual transformational potential of blockchain. Launched in 2008 by the mysterious Satoshi Nakamoto, blockchain is the underpinning mechanism of Bitcoin, which explains why the two—blockchain and digital currencies—are often confused. Blockchain is very often a poorly understood technology—so complex, in fact, that its intricate details remain obscure to all but a handful of experts. And yet, when it comes to assessing the impact of emerging technologies, the devil is in the details.
Blockchain is a decentralised shared ledger that can store various forms of information (e.g. records of transactions, computer code, archive entries, digital content). Because the ledger is entirely decentralised, i.e., no central `authority’ vouches for its authenticity, it is not only essential that everyone has the same version of the ledger, but also that no one can tamper with it. This is where the power of blockchain resides. It makes adding new entries to the ledger significantly costly—by means of complex computational problems that need to be solved—so that tampering with the ledger would effectively be infinitely costly. As a result, no central authority is needed to maintain and update the ledger.
Coming from nowhere, with no support aside from its users, the incredible development of Bitcoin, and its rapid growth in popularity as well as in value (e.g. from USD 2,000 to USD 17,900 between June and December 2017) has led to the wildest fantasies. In the context of booming Fintechs and across-the-board ‘uberisation’, companies have been seeking to make sense of upcoming disruptions caused by the blockchain technology. Use-cases have been identified in finance, supply chains, insurance, pharmaceuticals, government, military, etc.
Yet, such sudden infatuation tends to happen, with every new technology. Technology basically blinds us to the point that we forget that it is nothing without usage. Emerging technologies (think laser, 3D printing, and even PCs) often remain for decades ‘solutions without a problem’, as none of usages initially envisaged end up making sense. It is when the right usages finally emerge (optical disks, for instance), that they become suddenly disruptive. Instead of speaking of ‘disruptive technologies’, we should really be speaking of ‘disruptive usage’.
So what does this mean in relation to blockchain?
The many envisioned usages—exchange of financial assets, micro-lending, food and shipment tracking, digital identity, smart contracts, e-government, drug authenticity checks, etc.—are all very interesting, but none of them effectively require blockchain—a well-functioning, secured platform would work just as well. For all these use cases, it is easy to find existing, similar activities that do not involve blockchain to any extent. In fact, it could be argued that blockchain is sometimes so poorly understood that it has become a new synonym for ‘digitisation’.
If all could be done without blockchain, what would be the advantage of doing things with a blockchain?
Blockchain is secure, but so are the many banking, financial, and public services we use every day. The (only) real advantage of blockchain is that it is completely decentralised and does not require pre-existing trust. But there is a catch. First, there are limits to the ‘trustlessness’ of the system; only what is happening on the blockchain is guaranteed. For anything else (swapping Bitcoin for $, tracking physical goods, etc.), you have to trust that the other side of the deal will indeed happen. Secondly, the ‘trustless’ environment comes at a significant cost: for it to be fully decentralised, secured, and not require trust, blockchain requires a ‘proof of work’ to make it impossible for anyone to tamper with the ledger. This means thousands and thousands of ‘miners’ carrying out simultaneously highly intensive computer calculations so that one of them wins the right to add a new entry in the ledger. All the rest is basically wasted. Many studies have pointed out that Bitcoin is exceedingly wasteful: a single Bitcoin transaction leads to a consumption of several hundred kWh of energy, enough to power a house for a couple of weeks or run a fridge for a whole year. Clearly, a well-designed ‘traditional’ platform would be much more efficient (and just as secure). While attempts have been made to overcome this issue, removing the ‘proof of work’ creates problems of its own. Indeed, for the system to remain secure, it has to remain infinitely costly to tamper with it. The only way to decrease this cost is to establish (or assume that there is) some form of trust in the system and/or decrease its degree of decentralisation.
Bearing this cost in mind, what are the key usages of blockchain?
Only two really stand out: when one does not want to use a middleman or when one would like to use a (trusted) middleman, but one cannot be found. While the first usage is clearly fringe, the second is the source of the actual blockchain disruption.
While predicting the future is always difficult (especially in the case of emerging technologies), considering the current and foreseeable state of the technology, it is unlikely that any sizeable company will find blockchain of significant interest for its core business (though they might rebrand existing services as ‘blockchain’ anyway). Likewise, any small or emerging structure that may have no choice but to use blockchain (for lack of a trusted intermediary or authority) will most likely eventually, as they grow, find it more fitting to use a more centralised platform.
However, the critical point is that blockchain does not need to be used for it to be disruptive. The simple threat that it might be used might be sufficient to disrupt existing markets and undermine established businesses.
In fact, blockchain might even be the last piece of the ‘digital disruption puzzle’. Indeed, digital disruptions, whether related to content, services, and, tomorrow, manufacturing, all require a trusted, central intermediary/platform (e.g. Facebook, Airbnb, eBay) to develop on a significantly large scale. Until such a trusted intermediary emerges, disruption has to wait. Blockchain helps kick-start things much more rapidly and on a much smaller scale—any niche, regardless of how insignificant it may appear, can be explored. While blockchain is unlikely to be used to compete head-on with established businesses, it will do so sideways, exploring new usages, new ways to do things, with new actors and stakeholders. Incidentally, disruption might not be visible for a long while, until it appears that the activities of established businesses have themselves become a niche in a much wider market they no longer control, just like it happened with the music industry,still pursuing high-quality audio with DVD-A and SACD, when all people wanted was low-fi MP3 to take on the go), or the hotel and taxi industries with people renting couches or sitting in a stranger’s car.
To sum up, change is coming, but not in the way we envisage it. In this brave new world it has unleashed, blockchain might not even play a significant role—who uses peer-to-peer networks now that Netflix and Spotify exist? Meanwhile, it is time to take a good pair of sunglasses to finally see blockchain for what it actually is: a niche technology whose very existence might nonetheless disrupt even the most established players, by facilitating market entry.
But the fact that anyone can enter a market does not mean that they will. It is for established players to radically change their business models to ensure that they remain tomorrow the central players of a much wider ecosystem.
About Thierry Rayna
Prof. THIERRY RAYNA, PhD, is a professor of Innovation Management at École Polytechnique, within the Department of Innovation Management and Entrepreneurship, and a researcher at the CNRS i3-CRG (Management Research Centre, Innovation Interdisciplinary Institute).