Lora Cecere, the Supply Chain Shaman, makes some interesting points in this article on blockchain adoption. I’m going to comment a bit below after you look at Lora’s brief note:
I was sitting with a representative from the United Nations on my way back from Colombia. As we took off from Bogota, we discussed the potential of blockchain to help her with feeding children in the highlands of the Colombian-Venezuelan border.
Lora is certainly right about the complexity compared to conventional business systems, and the obscurity of the data structure. For all their issues in the early days, relational databases were essentially rather a transparent structure. And they succeeded where networked and linked databases, more complex structures, did not. It wasn’t till Excel became commonplace that people really ‘got’ the table structure of relational databases. As Lora indicates, there is certainly not organizational readiness– certainly not enough professionals trained to understand and communicate what’s going on in the system to ordinary folk– the famous ‘business translators’ McKinsey, the consulting group, says are in such short supply.
And she’s right about the security issue. While blockchain is touted as more secure, the recent history of the bitcoin movement detailed here (https://blockgeeks.com/guides/what-is-segwit/) indicates that frequent issues have arisen, are still not settled, and are still emerging.
Her last issue, more sticks than carrots, I found interesting. But this is typical of the economics of very competitive industries. At the limit of perfect competition there is no profit; all the extra gains, or ‘rents’ as economists call them, go to the providers of inputs. In the case of blockchain, that will be the miners.
Another point not mentioned by Lora is the fact that blockchain systems rely on economic incentives to work. Unlike ERP, for instance, in blockchain there must be compensation for the work of processing each transaction. That might be considered a strength– you can’t escape transaction costs or hide them– but it’s also a weakness, as detailed in the excellent blockgeeks writeup above. Every aspect of blockchain involves incentives, and if they are not at the right level, for all the participants, the system fails to function well. It may in fact blow up, and no one has responsibility. Humpty-Dumpty cannot be put back together.
Finally the economics at root has to relate to the actual money that users spend and get. In blockchain, of course, the transactions are ‘monetized’ in terms of a ‘cryptocurrency’ such as bitcoin or the ethereum currency– it’s embedded in the system. While these are a very small part of a company’s exposure, it doesn’t matter much how the currency is translated into real dollars or euros. But when it becomes big, the accountants and SEC are going to start asking how much real money is this. Now the value of bitcoin over time has been much publicized– we’ve all heard of ‘bitcoin millionaires’, who bought a small amount of bitcoins only to see them jump in value many times. But recently bitcoin has been a very volatile currency, changing value relative to dollars for instance by very large percentages in a very short time. this could make for massive fluctuation on the books of large trading companies who are using a blockchain system for managing say ocean logistics or freight contracts as their only business; say a freight forwarder. Someone is going to force them to declare how much in their book currency all this is worth. That will require massive adjustments as the conversion rate of the cryptocurrency, which is very thinly traded, with respect to say the dollar changes.
As evidence that some are concerned, we only need to look at the fact that the Chinese government has banned ICO’s (initial coin offerings) of cryptocurrencies by Chinese companies. They see the problem, and they are determined to prevent it obscuring or diluting value.