By Ken Cottrill, Co-Founder and Research Principal
2017 was supposed to be the Year of the Blockchain Pilot in the financial services industry, but it didn’t quite pan out like that.
What blockchain lessons can the supply chain community learn from the financial markets?
Several industry panels at the Blockchain for Wall Street conference on November 14, 2017, in New York City, took a retrospective view of their efforts to advance blockchain solutions during the year. They reported significant achievements in many key areas, but patchy progress towards the completion of fully-fledged pilots.
In their defense, the task of changing multi-trillion-dollar, heavily regulated banking systems is not to be taken lightly, especially when the existing technology – albeit now quite old – functions well. Also, there was a general acceptance that the industry is a comparatively slow innovator.
Still, the lack of successful pilot completions this year underscores just how challenging it is to implement a highly disruptive technology.
One lesson that panelists discussed was that it’s not always necessary to reinvent the wheel when applying blockchain technology. For example, avoid redefining standards when the existing ones will do the job perhaps with some tweaking. Also, don’t shy away from solutions that support – rather than replace – existing processes that work well.
Beware of extravagant claims associated with proof of concept (POC) projects. It was pointed out that some startups undertake POCs for free, so they can make announcements about “breakthrough” achievements. A close look at these claims can reveal that the projects barely moved the needle.
Pilots sound better than POCs, but are much more exacting, especially when it comes to creating consortia of disparate entities to participate in projects. Often it makes more sense to look for point solutions that build momentum rather than aiming to meet an overarching, grand goal.
Even if such a goal is achieved, participants still face the challenge of having to migrate the ecosystem they have created to the blockchain system. They are confronted by knotty issues such as who has the rights to put smart contracts in place. So-called “stranded costs” is another issue that the financial services industry has encountered; the investments made in existing infrastructure and the extent to which they are rendered redundant by blockchain-driven innovation.
Several panelists support the view that permissionless blockchain technology will win out eventually, but in the meantime companies will continue to cling to permissioned or private blockchains as the safer option. For example, Chris Ferris, Governing Board Member & Chair, Technical Steering Committee, Hyperledger, said that his group focuses on private blockchains because if something goes wrong it’s possible to identify the other parties involved and use the legal system if necessary.
Consensus mechanisms, and notably the zero-knowledge proof protocol developed by Cornell University, are attracting much attention, but the performance tradeoffs remain a hurdle. The scalability of blockchain solutions is another issue that the industry is grappling with.
Smart contracts are inching forward as viable solutions, but very large, complex contracts are still difficult to enshrine in code. Better tools are needed to convert legal prose into code, and a lot of work is going on to automate this process. Ideally, smart contract teams should include lawyers, accountants and developers, but often this does not happen.
Will 2018 be the Year of the Blockchain Pilot in financial services? There was some optimism at the event that blockchain technology will make this leap next year.
The industry’s regulatory responsibilities and the vast volumes of transactions it processes distinguish it from supply chain. However, many of the technical problems it is trying to solve are relevant in the supply chain domain.
Given these obstacles, it is a testament to the anticipated value of blockchain solutions that financial markets are pressing ahead with substantial investments in the technology, and continue to lead the way.
Hopefully, this work will enable industries such as supply chain to leapfrog some of the thornier problems that impede blockchain applications.
As one panelist pointed out, the ultimate goal is to reach a point where blockchain solutions “blend into the background” in such a way that users are unaware of the technology’s inner workings.