Don’t count on blockchain disrupting commercial processes anytime soon


Sharp criticism of the blockchain moves the debate about its efficacy beyond the cryptocurrency melée. Where is the merit in this burgeoning story?

businessman-cryptocurrencyLost in the Bitcoin mania and feud over whether it’s the latest form of get-rich-quick speculation or a legitimate new form of currency is the fact that Bitcoin and similar cryptocurrencies are built upon blockchain, a technology for distributed, secure ledgers with utility in commercial applications. Bitcoin has generated enough hype that there’s plenty of spillover to fuel exuberance for related blockchain technologies, namely an assortment of so-called altchain distributed ledger systems.

These systems aren’t designed to replace sovereign currency, but to streamline, secure and automate business processes and information sharing. As such, they eliminate some of the complexities and adverse externalities of Bitcoin, notably energy-intensive coin mining, financial speculation and ledger/currency forks.

Nevertheless, such business blockchains come with their own set of challenges since the concept of programmable distributed ledgers is sufficiency unique that they can’t easily substitute for established processes. Some skeptics doubt they ever will.

Note that proponents of systems like Ethereum, Hyperledger and Quorum that are targeted to scenarios in business and financial markets might argue details, but for our purposes, they share enough similarity with the cryptocurrency ledgers people have heard about to use the term ‘blockchain’ interchangeably.

While I don’t share the view that blockchain provides minimal benefits to existing forms of software automation, it’s doubtful that blockchains will soon displace many enterprise processes, as a look at its history of problems and prior technological analogs will show.

A history of financial risks and futility

Blockchain boosters see a raft of business applications such as settling international payments, securing and expediting lines of credit, streamlining supply chain management, automating energy trading, recording and settling real estate transactions and insurance claims through so-called smart contracts, and securely sharing healthcare information.

However, skeptics see little value in layering a distributed ledger atop systems that have long been software automated. One of the most thorough blockchain takedowns comes from Kai Stinchcombe, co-founder and CEO of True Line Financial, who recently wrote that (emphasis added),

After years of tireless effort and billions of dollars invested, nobody has actually come up with a use for the blockchain — besides currency speculation and illegal transactions.

Each purported use case — from payments to legal documents, from escrow to voting systems — amounts to a set of contortions to add a distributed, encrypted, anonymous ledger where none was needed. What if there isn’t actually any use for a distributed ledger at all? What if, ten years after it was invented, the reason nobody has adopted a distributed ledger at scale is because nobody wants it?

Although many of blockchain critiques focus on Bitcoin as a currency, he also pokes holes in the technology’s use for smart contracts, stock issuance (IPO replacement), distributed storage, secure messaging and user authentication. Of course, cryptocurrency is where everyone is now focused and here, between Bitcoin’s wild price swings, history of theft and risk of losing or forgetting one’s credentials, it’s a poor substitute for banking. Citing the Mt. Gox debacle, Stinchcombe quips,

Imagine the world if more banks had been drained of customer funds than not. Bitcoin is what banking looked like in the middle ages — ‘here’s your libertarian paradise, have a nice day.

He also notes that use of blockchain as a platform for micropayments has been lukewarm at best, noting that clearing Bitcoin transactions isn’t as instantaneous and friction-free as advertised, making it unsuitable for things requiring instant gratification like one-time content purchases, which is why small-dollar subscriptions have proven more efficient and popular.

The situation isn’t any better for settling large transactions where Stinchcombe notes that, despite being available for three years, the blockchain-based Ripple system for bank transfers handles as much transaction volume in a month as the SWIFT interbank network does in 40 seconds, i.e. a 65,000-times difference. While I can’t verify his numbers, nor contention that the overhead of the two systems is comparable, as someone who runs a financial business, I’ll trust someone with first-hand experience and a business incentive to use the most efficient settlement mechanisms available.

Granted, major banks and financial firms have made no secret of their investments in blockchain technology, however these are still lab experiments, not production systems. Furthermore, Stinchcombe points out, the notion of blockchain eliminating financial middlemen is a pipe dream since institutions like NASDAQ, banks and even the IRS are intermediaries for a reason: people and governments require a level of accountability and legal compliance that can’t be automated away.

What about process automation?

The poster child of blockchain business scenarios is the smart contract, namely self-executing contracts and transactions that are cryptographically secure, verifiable and irreversible. These sound better on paper than in practice, since as Stinchcombe notes, aside from perfunctory boilerplate like EULAs, contracts are typically complex instruments that require negotiation and haggling. Furthermore, the consequences of a hacked, irreversible contract are sufficiently dire that few organizations want the risk for minimal benefit. As he puts it,

Even the most die-hard blockchain enthusiasts actually want a bunch of humans arguing about the underlying intention behind a contract, rather than letting the software self-execute.

The situation isn’t much better for other automatable, usage-based subscription-backed software purchases like cloud services. Sure, a smart contract might be able to automatically instruct AWS to spin up new compute instances, add storage and connect it to a load balancer, but AWS and other cloud services can already do this and adjust your monthly bill accordingly. As Stinchcombe points out,

The idea that smart contracts would change this is a fallacy — it conflates the legal arrangement being put into effect with software with the legal arrangement itself being coded as software. Amazon’s terms of service are not a smart contract, but the billing system that implements those terms is automated.

Don’t discount blockchain just yet

Current proposed blockchain uses often seem like trying to pound a square peg into a round hole, however it’s too early to discount the technology. The reason, according to two Harvard Business School professors, is that unlike most overhyped technologies, blockchain isn’t disruptive, but rather foundationational; i.e. it’s less like the cell phone and more like the TCP/IP protocol. As such, they write that,

It has the potential to create new foundations for our economic and social systems. But while the impact will be enormous, it will take decades for blockchain to seep into our economic and social infrastructure. The process of adoption will be gradual and steady, not sudden, as waves of technological and institutional change gain momentum.

The professors recount the 30-year history of TCP/IP maturation as it evolved from an experimental network for academics and researchers to a ubiquitous communication platform that enabled new products, services, business models, even industries. Their work shows that,

History suggests that two dimensions affect how a foundational technology and its business use cases evolve. The first is novelty—the degree to which an application is new to the world. The more novel it is, the more effort will be required to ensure that users understand what problems it solves. The second dimension is complexity, represented by the level of ecosystem coordination involved—the number and diversity of parties that need to work together to produce value with the technology.

Applied to blockchain, it means that as applications such as smart contracts change broader economic, social and political systems, thus affecting more users, they require coordinated activity of many stakeholders and concomitant “institutional agreement on standards and processes.” For example,

A tremendous degree of coordination and clarity on how smart contracts are designed, verified, implemented, and enforced will be required. We believe the institutions responsible for those daunting tasks will take a long time to evolve. And the technology challenges — especially security — are daunting.

Thus, blockchain is still in the ‘start small and experiment’ phase and likely a decade or more away from substituting for critical, well-established and trusted business processes.

An alt view from Jon Reed

Fellow analyst Jon Reed was scathing about Stinchcombe’s approach noting that:

Most of the objections Stinchcombe raises from the peanut gallery are problems to be solved, not insurmountable obstacles. I don’t see blockchain as revolutionary, but I believe we’ll see subledger scenarios where it proves effective.

He neglected, however, to break down one of the most interesting use cases, a Chinese food safety alliance with IBM, Walmart, and Tsinghua University. (“Recent testing by Walmart showed that applying blockchain reduced the time it took to trace a package of mangoes from the farm to the store from days or weeks to two seconds.“) It stretches credibility to imagine this alliance was formed out of vanity, or a marketing push to find a sexy slide for a distributed ledger project.

Even as blockchain projects go live, critics like Stinchcombe might ask, “did this have to use a distributed ledger?” If there isn’t a convincing answer, he’ll have a point. Though in the Walmart-IBM alliance, it’s “traceability and transparency” that justify the tech. Note: I get into live projects and outlook in my chat with Hyperledger’s Director in Is blockchain enterprise-ready? A Hyperledger gut check with Executive Director Brian Behlendorf.

Editor’s note: I thought that with single ledger systems like Workday that we’d consigned the horrors of subledgers to the dustbin of history. Clearly, I’m wrong. For now.

My take

Stinchcombe’s voice may be the one receiving more than its fair share of attention but he is not alone. In an op-ed on Medium, Rick Bullotta asks the prosaic question: Is Blockchain A False Sense of “Trust”? Once again, a not unreasonable argument but one we’d expect to see addressed at the enterprise level in fresh iterations of variants like Hyperledger.

It’s easy to let blockchain skepticism descend into cynicism, particularly when the popular focus is on Bitcoin as the latest easy money scheme. I remain dubious that cryptocurrencies will ever play a meaningful part in either our business or personal financial affairs since its professed advantages of efficiency, anonymity and security will (or have been) eroded by laws, regulations, hacks and criminal exploits. Other colleagues see cryptocurrencies as little more than a Ponzi Scheme – and with some justification.

Nevertheless, blockchain technology as a secure, immutable, auditable transaction ledger has promise as a process accounting and automation tool, particularly when used in the context of open platforms like Hyperledger (see our discussion with its Executive Director here) that are designed for business scenarios, not crypto money laundering.

I agree with the Harvard professors that there’s a good chance that blockchain will affect your business, “The very big question is when.” The long evolution gives organizations the luxury of time to strategize, experiment, start small and scale. There’s no need to let the Bitcoin gold rush stampede you into rash, misguided and costly reactions.

Image credit - © Elnur -

Disclosure - Workday is a premier partner at time of writing

    1. Jon Reed says:

      Kurt – good piece.

      Interesting you thought my take on Stinchcombe was scathing as I actually thought his piece was an important read. I do think my additional paragraph that was in the middle of the quoted part you used bears mention here:

      “But Stinchcombe gets kudos for diligence – and polishing our collective BS detectors. He’s not just venting spleen but deconstructing use cases. His fundamental question: just how important is a distributed ledger when you’re not trying to build a completely independent system like Bitcoin? That should haunt/motivate blockchain advocates.”

      I wish I could feud heavily with you to spark drama but I don’t disagree with really anything you’ve written here. For your point:

      “I remain dubious that cryptocurrencies will ever play a meaningful part in either our business or personal financial affairs…”

      I would agree there. Your title:

      “Don’t count on blockchain disrupting commercial processes anytime soon”

      is not in conflict with my views. Ironically, I think the blockchain use cases that will get some traction first won’t really be disruptive in some profound sense. Some of them may bring new process efficiencies. The “disruptive” use cases that get folks excited are actually filled with so many regulatory and tech and process hurdles that it’s hard to put much stock in them.

      But blockchain could still be effective fleshing out new use cases that aren’t necessarily hugely disruptive. For example that Walmart-IBM China food safety project is not what I what call highly disruptive. But it may prove to be an improvement to existing systems. Alternately, a use case closer to production is the Everledger diamond blockchain, intended to help address the issue of blood diamond in the market. I wouldn’t call this “commercially disruptive” but it could serve a useful purpose.

      Strangely enough the most relevant blockchain use cases are more realistically practical than revolutionary (currency) or hugely disruptive. Kind of reminds of “AI” but that’s another convo 🙂

      – Jon

    2. Dears,

      Scalability needless to say sustainability over time (energy) is the issue of the current block chain or p2p (like ripple stellar like) technologies sold and marketed as crypto currencies – although I myself favour the latter as they can guarantee privacy even more than the former … This does not mean that either techies is ready for this: responsible (predictive) data analytics for such purposes is still far off and has still to be provided s.t. provider nor governmental agencies can lurk into one’s exchanges with e.g. a friend and try to tax this – latter parties have no added value whatsoever in this imho.

      Kind regards, Alf.

    3. greg misiorek says:

      Hi Kurt,

      it’s ok, if not expected, to be skeptical and we seem to share our doubts about smartness of software contracts and ripple’s ability to unlock the full potential of the SWIFT payment system. you also seem to think that hyperledger is one of the best current experimental blockchain consortia.

      that kind of leaves bitcoin – the oldest and, at the moment, beaten up (ca 25% down from the recent all-time high dollar valuations) blockchain implementation, but which has experienced unbelievable acceleration last year and is well beyond being a medium for illegal payments – that was in 2014 if i get my dates straight. it is a legitimate investment vehicle, especially after having started being traded as futures (dumb?) contracts and we have to report it on our tax return.

      in his quest to debunk blockchain as the new technology in his often quoted blog, that you refer to above, the author goes too far and throws baby with the bath water. sure, there a lot of bubbliness in the ‘cryptocurrency market’, if not an outright repeat of the dotcom mania, but there may already be a blockchain Amazon out there and it will disrupt the banking just like retail has been disrupted by the internet. an on-line bookstore was once just an experiment but it stopped being one when Borders shut down and cloud is now giving a run for their money for Microsoft, IBM, and quite a few other technology incumbents.

      by way of answering your tweet:

      thx, greg

    4. My take blockchain like technologies already have adoption in software development. Blockchain processes as standards follow adoption in enterprise. For insights follow the ongoing evolution of enterprise applications from on-premises to online services in the cloud.

      First. Relational databases are being superseded by NoSQL databases for scalability and low latency in cloud computing services.

      Second. ERP/ CRM application services in the cloud requires connecting IoT devices on-premises, similar to smartphones on-persons synced to cloud.

      Third. AI requires huge globs of data for machine learning analytics. Distributed ledgers allow for adhoc APIs with permissioned controls via selective sharing.

      Fourth. Delivering the above requires new digital enterprise software licensing already evident in SAPs struggling to find a solution for indirect data access.

      Fifth. Take if from Jeff Bezos the above is happening at Amazon. Google his Big Mandate issued in 2002 covered by Steve Yeggi.

      1) All teams will henceforth expose their data and functionality through service interfaces.

      2) Teams must communicate with each other through these interfaces.

      3) There will be no other form of interprocess communication allowed: no direct linking, no direct reads of another team’s data store, no shared-memory model, no back-doors whatsoever. The only communication allowed is via service interface calls over the network.

      4) It doesn’t matter what technology they use. HTTP, Corba, Pubsub, custom protocols — doesn’t matter. Bezos doesn’t care.

      5) All service interfaces, without exception, must be designed from the ground up to be externalizable. That is to say, the team must plan and design to be able to expose the interface to developers in the outside world. No exceptions.

      6) Anyone who doesn’t do this will be fired.

      7) Thank you; have a nice day!

      Lastly, this all brings up computer security inherent in ‘crypto-commerce’ (my area of work).

    5. With all due respect, but I disagree with the article.

      I don’t however disagree with the fact that there are only few blockchain products out there in production, that are not related to the crypto-currencies. And there are many slid reasons for it:

      1) The standard use case for the B2B blockchain is when ALL market players (ALL banks, ALL insurance companies, etc.) in a particular market or territory agree to transmit their data on the blockchain. This is difficult.
      2) Legal aspects and the validity of a transaction. Many tax authorities want a ‘physical’ evidence (paper) of a transaction and still do not recognise the blockchain as a single point of truth. This is an issue.
      3) The blockchain is a mental exercise. Stakeholders cannot be easily convinced. With so many cases of hacks, fraud, computer crime, exploits, etc. owners and managers are very difficult to be persuaded that there is a super ‘bullet proof’ immutable shared database.
      4) Technology is not mature. People are not mature as well. 99% of the ‘blockchain community’ are talkers, the remaining 1% are the people who can deliver. There is a lot of technical talk going on and the technology is complex.
      5) There is a lot of unnecessary talk about the blockchain, that creates hype and over-expectations.

      Kai Stinchcombe forgot also to mention that blockchain for something else than crypto is out there from 2015 and not 2009.

      Do not trouble your minds with the adoption of the technology. At INDUSTRIA (the company I am managing) we are working on two rock solid blockchain implementations (for a niche thing in the supply chain and a charity project). Both of these projects cannot be done with anything else than blockchain and the very reason for them to exist in first place.

      I am very, very positive about the blockchain thing. Sleep well.

      1. Jon Reed says:

        “Kai Stinchcombe forgot also to mention that blockchain for something else than crypto is out there from 2015 and not 2009”

        That’s my biggest criticism of Stinchcombe’s piece. It’s sensational to imply enterprises have been trying to find use cases for blockchain for a decade. That sensationalism bothered me and undermines his arguments, some of which were quite valid.

        – Jon

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