Crossing the Chasm: A (Mostly) Bullish Blockchain Investment Thesis
This insight has been produced jointly by Shifara Samsudeen, ACMA, CGMA and Supun Walpola at LightStream Research
Blockchain Lags in Adoption
Despite being over a decade since it was first conceptualised, both Bitcoin and its underlying technology, blockchain, seem to have lagged in terms of adoption. It is estimated that there are around 25 million Bitcoin users today, which is still less than 0.5% of the global population. Given that nothing concrete has been built on blockchain yet, apart from Bitcoin itself and perhaps some selective altcoins, the level of blockchain adoption shouldn’t far exceed this number either. This slow progress is also highlighted by a 2018 survey by Gartner that indicated only 1% of the corporates surveyed had so far deployed any form of blockchain solution.
Does it really matter?
Putting things into context, the internet was first conceptualised in the early 1960s, but it took around 5-10 years for developers to come up with a viable prototype. It took a further decade or so before the modern day internet was born in 1983. A decade later, in 1993, internet adoption in the US was still around 10%. Thus, how fair it is for us to say that blockchain has not achieved anything over its first decade of existence?
That being said, the rate of technology adoption seems to have got faster in recent times. It took around 40 years for Cable TV to reach an adoption level of 60%, for internet, it took 20 years (from 1983), and for social media, it took less than 10 years. So, why is blockchain still below 1% a decade after conception?
Fear, Uncertainty & Doubt
While crypto gains all the headlines, the majority of blockchain use-cases are actually still in their nascent stages and are overshadowed by many of the negative connotations attached to crypto, hence, there is still a great deal of uncertainty surrounding them. Governments and public administrators worldwide remain sceptical about cryptocurrencies and ICOs, but at the same time, have failed to come up with a decent regulatory framework to scrutinise them. Hackers and scammers have also not helped the cause (we have covered this angle in detail in one of our previous notes, Hackers! Hackers Everywhere! – An Update on Crypto-Security).
For blockchain, perhaps the biggest challenge is to differentiate between bold claims and what the technology can actually achieve. For instance, during the MERL Tech DC 2018 conference, professionals, John Burg, Christine Murphy, and Jean Paul Pétraud, did a session on Using a Learning Agenda to Address Knowledge Gaps in Blockchain. The essence of the session was how the lack of evidence supporting value claims of blockchain is a critical gap for potential adopters. The presenters had documented 43 blockchain use-cases through internet searches, which had some glowing claims like “operational costs… reduced up to 90%” or with the assurance of “accurate and secure data capture and storage”, but had failed to verify these claims with any evidence, even after reaching out directly to these blockchain firms.
Are Enterprise Blockchains the Catalyst for Blockchain’s Mass Adoption?
Decentralisation is one of the core attributes of blockchain that made alternative currencies like Bitcoin a possibility. The fact that all transactions are recorded on a public ledger made it immutable and left very little room for fraud. However, until now, blockchain’s decentralised mechanism have had little practical use outside of the crypto-world, especially when it comes to enterprise applications – another key reason for blockchain’s slow adoption. For example, a company planning on deploying blockchain to manage its supply chain activities can’t afford to have all the information about their suppliers and shipments on a public blockchain (which could be read by anyone) for obvious reasons.
However, recently, we have witnessed the emergence of a new class of enterprise-grade blockchain implementations led by the likes Hyperledger, Corda and various customisations of Ethereum. In contrast to public blockchains, where data is accessible by anyone, these enterprise blockchain implementations are private and controlled by the originator – a necessary prerequisite for their potential deployment at major corporations and financial institutions. We have covered the pros and cons of private blockchains in detail in the previous leg of this report.
From Decentralisation to Interoperability
Private blockchains barely resemble their public counterparts in terms of decentralisation and immutability, or lack thereof. Private blockchains by definition are centralised, in which either the originator (or in other words the organisation who is deploying the blockchain solution) or rules set by the originator decide how the network operates – the originator gets to decide who could participate in the network and what activities they could perform on the network. While this provides an additional layer of security for companies looking to deploy blockchain based solutions, it is a significant departure from the original concept of blockchain, where the ingenuity mainly came from decentralisation. Instead, the advantage private blockchains offer major corporations, key industry verticals and governments are the ability to modernise their outdated, legacy practices making them more efficient and more profitable.
In particular, we would highlight the potential of blockchain to improve interoperability between legacy systems as an area to watch closely. One of the key points of inefficiency with current IT systems stems from the fact that many of these systems were designed for a pre-cloud environment and thus operate under a siloed approach. This naturally incurs significant costs in terms of both time and money when trying to get these legacy systems to interact with each other. It is this inefficiency which blockchain could potentially circumvent by effectively becoming an intermediary language with strong security that acts as the interconnect. As the number of systems and applications in existence grows exponentially, the potential number of connections between these systems will grow even faster still. If blockchain can indeed act as the translator between all these myriad systems, then those companies which make most effective use of that functionality will also most likely be the most efficient. In the same way that IT revolutionised information reproduction and the internet revolutionised communication between individuals and content delivery, if blockchain is able to revolutionise verification procedures and communication between systems themselves its impact on business and social processes could be similarly large.
How Can Blockchain Disrupt the Existing Business Eco-Systems?
For a larger part of our report we have focussed how this new wave of private blockchain infrastructure could potentially disrupt the existing business eco-systems. We have summarised our findings below:
Supply Chain Management– Blockchain would essentially bring all the participants in a supply chain (suppliers, sub-suppliers, cargo handlers, warehousing services, monitoring authorities and customers) together and allow companies to manage them under a single network. The biggest advantage of using blockchain in SCM is that goods can be traced back to their source using blockchain records, which would ensure that goods are coming from a trusted supplier who follows the necessary quality standards and other best practices set by the company. In a situation where goods are either faulty or damaged they can be easily traced back to the counterparty who is responsible. SCM is currently one of the few disciplines where blockchains have made some decent progress with some big names like Walmart, ADNOC and De Beers successfully launching blockchain pilots.
Voting – Blockchain technology would be the key to make remote and mobile voting a possibility at the national scale, a feat no country has yet been able to achieve. Under a blockchain based voting mechanism, both voter registration and voting processes can be carried out through a smartphone, making the process more convenient for voters. One of the major risks of e-voting systems is that they run the risk of being compromised due to cyber-attacks. However, the immutability of the blockchain ledger makes it impossible for anyone to hack into and alter voting records. There have been several pilot projects over the past few years involving blockchain technology for voting at national level elections including the famous West Virgina Pilot, which allowed overseas military service members of West Virginia to vote during the 2018 US mid-term elections.
Ticketing – Blockchain technology can be used in the ticketing industry to issue tickets as smart contracts that are linked to the identity of the buyers. This would prevent re-sellers from bulk purchasing tickets and selling them at inflated prices in the black market. Top players in the ticketing industry already seem to be experimenting with blockchain technology, with Ticketmaster, the market leader in event ticketing, acquiring the blockchain based smart ticketing platform UPGRADED last year.
Digital Identity – This is perhaps one of the most interoperable use cases of blockchain that we came across, where users can store their personal data on the blockchain, and counterparties like banks and government organisations who require a user’s identity information can access it by establishing a connection with the user on the blockchain. This would eliminate the need for counterparties to maintain separate records of a user’s identity information giving more data security and at the same time reducing the duplication of records.
Internet of Things (IoT) – Blockchain can create a secure and interoperable network for IoT devices to communicate with each other. Only trusted IoT devices would be permitted on the blockchain and data from these trusted devices would pass through decentralised consensus before being added to the blockchain. Such a system would be both efficient and less vulnerable to cyber-attacks compared to the current cloud based communication system (data sent from IoT devices to the cloud, where data is processed, and then sent back to the devices). Likewise, blockchain technology could play an important role in making the next generation of complex IoT eco-systems like smart cities, smart homes, smart cars a reality.
Data Storage – One of the inherent weaknesses of cloud storage is the risk of Single Point of Failure (SPOF). Therefore, in order to mitigate this risk, cloud storage companies usually duplicate data and store it across multiple servers. Alternatively, blockchain technology can be used to decentralise data storage, which could mitigate the SPOF risk at a significantly lower cost. Data is sharded into very small pieces and stored in millions of nodes across the globe making it impossible for hackers to steal data. Blockchain based data storage companies claim that its monthly storage cost is roughly 10x cheaper than that of its cloud storage counterparts.
Social Media – Social media platforms like Facebook have come under heavy criticism in recent times for exploiting the personal data of users for commercial and sometimes even illegal purposes. On the other hand, many argue that the current ad-revenue model of social media platforms is not fair, as its benefits don’t trickle down to network participants. The use of blockchain technology in social media tries to find solutions for these problems. We have taken a deep dive in to Mark Zuckerberg’s recent interview with Harvard Law professor Jonathan Zittrain on potential blockchain applications for Facebook.
Banking – Perhaps the most sought after use case of blockchain in the banking industry right now is as a settlement mechanism – where blockchain’s decentralised consensus is used to validate transactions faster while its immutability provides a reliable audit trail for the transactions. Blockchain based real-time gross settlement system (RTGS), Ripple, has partnered with nearly 200 financial institutions worldwide for early stage pilots. Some futuristic use cases of blockchain in the banking industry are having contractual agreements in the form of smart contracts and the use of blockchain to store KYC and credit score information of clients.
Insurance – Blockchain is currently one of the hottest topics in insurtech (the use of technology innovations designed to squeeze out savings and efficiency from the current insurance industry model). Blockchain technology can automate claims processing via smart contracts, which currently requires a lot of manual data entry and coordination between different parties. Blockchain has also fuelled some novel insurance concepts like Peer to Peer (P2P) Insurance. Several top insurers like Aegon, Allianz, Munich Re, Swiss Re and Zurich Re have got together to form the Blockchain Insurance Industry Initiative (B3i) – which is now identified as B3i Services AG – to explore the potential use of blockchain technology in the insurance industry.
Loyalty Programmes – One of the biggest downsides of the current loyalty points systems is the fact that the issuing company could expire the points of the customers if they are not redeemed in a given period. Alternatively, when reward points are tokenised, customer’s right to ownership is recorded on an immutable blockchain. Currently, reward points from a business can often only be used in future transactions with that business. In contrast, branded tokens are more liquid, as they can be swapped for other cryptocurrencies or branded tokens of another company.
Use Cases are Still Mostly Conceptual, but their Disruptive Potential is Hard to Ignore
Most blockchain use cases that we came across in our research are still at their conceptual stage, or at best, are at early stage pilots – much like the internet in the early nineties, with lots of use cases, but nothing really concrete. That being said, it is hard to ignore the potential blockchain has to disrupt the ways in which business is done today. For example, Ripple’s cross-border settlement system can complete a transaction in less than five seconds and at a fraction of a dollar, which usually would take around 3-5 business days and cost around $40-$50. Platforms like Ripple could fundamentally change how cross-border banking activities are carried out.
The global corporations such as Microsoft, IBM and Walmart are also embracing the blockchain technology rather than being disrupted by the blockchain based start-ups. Their main aim is to hasten the business processes, increase the transparency of the way they do things and save billions of dollars in cost.
Top tech names such as IBM, Microsoft, SAP, Amazon and Google have already entered the blockchain space mostly through offering blockchain as a Service (BaaS) which helps different types of users to get started on their blockchain journey. This is probably one of the safest
places in the blockchain revolution to be; with more and more businesses moving into the blockchain space every day, the need for BaaS solutions, that would allow such businesses to deploy blockchain applications more conveniently, is likely to grow at a healthy rate.
Walmart has also been an early adopter of distributed ledger technology and the company has applied for more than 50 related patents for delivery improvement and buying smart appliance management systems in an attempt to improve food safety. Walmart has collaborated with IBM to create a user-friendly, low-cost, blockchain-enabled traceability solution for all its suppliers.
A Contrarian View on Blockchain
Scholars like Nouriel Roubini believe that blockchain as a technology offers little that was not already available elsewhere and before – citing how private blockchains are hardly any different from what the legacy database system has to offer. However, as a part of our research, we were able to speak to Dr. Chris Dark, a blockchain enthusiast, who takes a contrarian view on the matter. As he notes, the first generation of any technology is almost always rubbish. He compares blockchain to the first generation of mobile phones, which were bold, ugly and could only be used to make calls. Many people at that time believed they could do the same with a land line and mobile phones would make only a small difference, and they have been proven wrong. The key takeaway from this is when you compare legacy systems with a new technology, as in the case of databases versus blockchain argument, the one with the better use cases tends to outperform the other once you get to the second or the third generation of products.
Our opinion is that once blockchain passes its early stages of adoption and everyone comes to terms with what blockchain can do and what it can’t, it would be a matter of scaling all the “can dos” into viable mainstream products. The internet took about 30 years to reach this stage, and at best, blockchain could at least take another 5-10 years to reach this level. Until then, we recommend having a more passive approach towards blockchain related investments.
Moreover, it is our view that, despite the disruptive potential of blockchain, it would be unlikely to see the valuations of the companies that employ blockchain or offer blockchain based solutions being moved overnight. Instead, we believe the benefits of this technology are likely to be realised in the form of satisfied customers, better cross-selling opportunities, cheaper transaction fees, operational efficiencies in the form of lower stock losses and lead times etc., that would have a gradual but sustainable impact on companies top and bottom lines. Fundamentally, the companies which most effectively deploy blockchain in the future could see their business efficiency and the quality of their management information systems improve, making them more profitable and quicker to respond to threats and opportunities.
At this point of time, it would be more of a situation where you play the waiting game, but at the same time, understanding blockchain’s potential and making careful investments also becomes important. Much like the approach big names like IBM, Microsoft and even Walmart have taken towards the blockchain. If blockchain goes north, these companies are in a position to capitalise on the first mover advantage, and should it go south, the exposure towards downside risks are at a bare minimum. This is why we believe a passive but inquisitive approach to blockchain investments makes a lot of sense right now rather than simply turning a blind-eye to the technology.
Institutional Investors, Blockchain and Red Flags
The institutional investment giant Fidelity conducted a survey which included 450 institutions such as hedge funds, pension funds, endowments and wealthy families. Based on the findings, 22% of the respondents claimed that they already owned cryptocurrency and also noted that they expect to double their crypto allocation within a five-year period. That being said, a large number of institutional investors still have little or no exposure to blockchain and we believe this is mainly due to several reasons from legal uncertainty to the volatility of cryptocurrencies.
Blockchain projects/start-ups is a sensible way of having long exposure to the crypto and blockchain space, without having to directly invest in cryptocurrencies. However, as we have mentioned previously, most of these projects are hyped with exorbitant claims making it harder for investors to separate fiction from reality.
In the final section of the report, we have looked at a few pre-requisites to determine the legitimacy of a blockchain project and red flags to watch out for when investing in blockchain start-ups. We believe it is important for a blockchain project to have a strong whitepaper, which clearly explains what the project aims to achieve and how blockchain technology would help that cause with some concrete evidence. In addition to this, other main factors to consider would be the level of experience of the development and leadership teams, and the level of interest the project has got from traditional venture capitalists.
One Blockchain to Bind Them All…
While blockchain is still early in its lifecycle, the emerging value proposition appears to be about connectivity. We believe the reason behind this is disturbingly simple. Legacy systems were not designed to operate with and communicate with each other. They also duplicate work and information storage to a massive extent resulting in extreme inefficiency. While some redundancy is desirable for crisis scenarios the current situation could be improved upon dramatically. However, organising a coordinated shift to common systems tends to be a lost cause as territoriality and a fondness for homegrown products tends to interfere with such initiatives. Blockchain then could function as a common language and interconnector between these legacy systems, storing information that would otherwise be duplicated, and also reducing frictional costs by eliminating the need for manual intervention to transfer information from systems that are incompatible with each other. Anyone who has ever examined a large corporation’s back office processes would be painfully aware of the overwhelming inefficiency involved and the large scope for disruption that exists. For all its faults, if blockchain is able to do this, its impact could eventually be just as large as its hype… though for very different reasons than what is most discussed today.
Section A: What Industries Will Blockchain Disrupt?
- Blockchain for Supply Chain Management (SCM)
- Blockchain for Voting
- Blockchain for Ticketing
- Blockchain for Digital Identity
- Blockchain for IoT
- Blockchain for Data Storage
- Blockchain for Social Media
- Blockchain for Banking
- Blockchain for Insurance
- Blockchain for Loyalty Programmes
- Blockchain as a Service (BaaS): The Safest Bet
- Other Major Global Corporations Embracing Blockchain
Section B: Institutional Investors and Blockchain
- What are the Challenges in Institutionalising Blockchain?
- Major Institutional Investors Who Have Invested in Blockchain
- How to Determine the Legitimacy of a Blockchain Project or Red Flags to Watch Out for When Investing in Blockchain Projects
Appendix: Transcript of the Interview with Dr. Chris Dark
- Unlock research summaries
- Follow top, independent analysts
- Receive personalised alerts
- Access Analytics, Events and more
Join 55,000+ investors, including top global asset managers overseeing $13+ trillion.
Upgrade later to our paid plans for full-access.