A few months ago, Computerworld published an article titled “Here’s why there won’t be a quick enterprise blockchain revolution”. The article refers to a quote by Gartner’s vice president of research, Avivah Litan. Allegedly, Litan said the following: “I don’t think we will ever see a revolution in the enterprise” and “No one wants to give up authority. Think about it. It goes against an enterprise’s ability to control their own destiny. Full, complete blockchain is about no central authority. It’s just peer-to-peer”.
Cast aside that this quote is documented nowhere and that the actual Gartner report has a somewhat different tenor, the statement doesn’t hold up to scrutiny either. No enterprise is ever in full control of their destiny. From changing market situations to force majeure events, there’s a ton of factors that the executives of any given enterprise cannot control.
There are factors though, that enterprises absolutely want to control and by offloading these onto a public blockchain, they run the risk of losing this control. For example, banks want to be able to reverse transactions if they turn out to be fraudulent. This wouldn’t be possible on a public blockchain. However, the benefits of using distributed ledger technology in banking are undeniable. Cryptocurrencies already outperform traditional banking on transaction speed, fees for transferring large sums, and exchange fees for cross-border payments.
Additionally, the infrastructure surrounding cryptocurrencies have made vast improvements over the last year. Custodial services such as BitGo allow for the secure and insured storage of crypto funds in cold wallets. While in the past, holding and trading digital assets was only recommendable to those with at least decent knowledge of cryptography and cybersecurity, custodial providers will soon make it viable for the everyman to use cryptocurrency as a payment system.
This development is largely enabled by more sensible regulatory standards, which are being established by many governments around the world. As an example, Germany has very recently passed new legislation, which will serve two purposes. First of all, the new regulation will allow banks to hold cryptocurrencies and offer custodial services to their customers. Secondly, customers of custodial services in Germany will be protected by the same regulations as banks. It can be expected that other countries will follow Germany’s lead in the near future.
Very soon, banks may provide easy access to DeFi services to their customers.
In addition to the top-down process of regulation, a bottom-up standardization process has been kicked off by the industry itself. Just like the telecommunications industry agrees on standards that allow all cellphones worldwide to work together, irrespective of the phone’s manufacturer and the network operator, blockchain technology has to erect standards that enhance blockchain interoperability across different industries and use cases. One of the leading institutions for this process is the Enterprise Ethereum Alliance with over 180 member companies and 1400 individual members.
Core members of the Ethereum Enterprise Alliance.
It is likely that banks and many other enterprises will favor some form of permissioned blockchain over the public ones. In contrast to public blockchains where anyone in the world can set up a validator node without explicit consent from the other validators (hence the term permissionless), in permissioned blockchains, the network owner carefully selects the validators and can exert a certain degree of control over them, such as issuing the reversal of transactions, or freezing wallets. Ripple and EOS are examples of semi-permissioned blockchains as, theoretically, anyone can set up a validator, but the control a single validator has over the network depends on the network’s consensus mechanism.
Banks will be looking mainly for permissioned solutions, as this allows them to retain some control. This will result in either a private blockchain that is controlled by only one company, or a consortium blockchain where different companies or banks will be permissioned to set up a validator. For this purpose, the various members of the Hyperledger family can be taken into account. An example for this is the National Bank of Cambodia, which experiments with Hyperledger Iroha for cross-border payments. For back-end use cases like record keeping and auditing, Hyperledger Fabric might be an attractive solution. Other companies that experiment with blockchain technology include Bank of America, Mastercard, and JPMorgan.
On the side of public blockchains, new developments may create interesting enterprise solutions as well. With the introduction of Proof of Stake in Ethereum 2.0 and Layer 2 scaling solutions like the Plasma network, Ethereum may finally reach enterprise-grade scalability. Businesses that want to experiment with blockchain technology might become attracted to Ethereum’s huge ecosystem and its vibrant community.
As another example, Algorand Standard Assets can be created with a system of customizable options called Role Based Asset Control. Here, token creators can restrict the transferability of tokens, which can for example be used to freeze suspicious accounts or implement a whitelisting process that requires token holders to undergo additional steps, such as KYC/AML checks before they can transfer their tokens. Token creators may also activate an option that gives them full control over the tokens, as well as the ability to force transfers, for example in order to rectify a fraudulent transaction.
In this way, Algorand Standard Assets can be tailored specifically to a token’s use case and regulatory requirements. All of these functions, as well as many other smart contract functions and the ability to issue multi-party atomic transfers are implemented as a part of Algorand’s Layer 1 functionality, allowing them to be carried out with the same efficiency and security as simple payments on their Proof of Stake blockchain. Combined with enterprise-grade scalability, Algorand can be considered as an alternative to permissioned blockchains for many enterprise use cases.
Algorand Standard Assets fall into one of four categories as either functional or non fungible tokens, whose transferability can optionally be restricted.
Besides banking, there are lots of other applications for blockchain technology that are mentioned in the Gartner report. Gartner uses a framework called the Hype Cycle. With every technological innovation, there are high hopes in the potential usefulness of the new technology. These innovations always start off in an experimental phase. After some successful experiments, the technology becomes overhyped. Gartner calls this the Peak of Inflated Expectations. This is often the point where speculation bubbles begin to form, as large amounts of money are invested into innovative startups. The nature of startups has it that most of these ventures will inevitably fail, which is exactly what we have seen during the Dotcom bubble in the late 1990s and recently with the bursting of the ICO bubble in 2018.
In capitalism fortunately, failing businesses mean that the economy as a whole is failing forward. Every business that fails is a chance to learn something new and boy, did we learn from the bubble. Both investors and legitimate blockchain projects have grown a lot wiser since the wild west days of ICOs. Again, this process of enlightenment is supported by regulators and the regulatory development in the past year is a positive sign that the blockchain industry as a whole might already be crawling out of the trough of disillusionment, slowly but steadily.
While until this year, the leading paradigm of the cryptoeconomy was to “be your own bank” and to “decentralize everything”, this is shifting towards “choose your own level of (de)centralization”. Let us not forget that decentralization is a novel concept for traditional enterprise and most companies that currently experiment with blockchains don’t plan on complete decentralization. This however doesn’t mean that fighting to decentralize the world is completely futile, but keep in mind that this is a radical concept that, which widely contradicts the current corporate mentality.
Changing this corporate philosophy requires changes in consumer behavior. This means that the transformational power of blockchain technology cannot be fully achieved until there is a mass adoption of digital assets and consumers explicitly request services to be decentralized. Right now, the core blockchain community only consists of a few idealists, but these are acting as thought leaders for a whole generation of young professionals who feel disenfranchised under the current framework of centralized governance. In the long run, both enterprises and governments will be pressured into embracing decentralization, but every social change takes its time.
Taking all of this into consideration, Gartner might be accurate in predicting that most blockchain use cases will need another five to ten years before they unfold their transformational impact on industries. Rome was not built in a day either, so if you consider this a slow or fast process is up to you. For now, blockchain technology remains an experimental field, but there is a wide range of products and services that allow enterprises to experiment on a level of decentralization that they are comfortable at. There is however no doubt that blockchains will lead to a far-reaching transformation across industries in the future.