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Blockchain: A Lot of Hype…But Far From Reality

Written By Jack Reis

In October of last year, IBM and Walmart announced one of the largest blockchain partnerships to date, aiming to test the technology on the movement of packaged produce in China. Earlier this week, IBM also announced partnerships with Dubai Customs, Dubai Trade and a host of banks, freight companies and airlines to test the value of the technology as part of the recently announced ‘Dubai Blockchain Strategy.’ Based on these developments, it would seem that at least one of the world’s largest technology vendors are placing a significant bet on the future of blockchain technology – but why?

This is something that we get questions about quite frequently. People are generally aware of a thing called ‘blockchain,’ but most are unclear as to what the technology does and what business strategy implications might result from its increased adoption.

Blockchain is poised to upend traditional value delivery mechanisms

Fundamentally, a blockchain is a ledger that holds records of digital data. That ledger is open to be examined, but it cannot be changed, destroyed, or in some other way altered. Furthermore, the ledger is not owned by any one party. Rather, it is continually added to when a consensus of users verifies the occurrence of a transaction. Because blockchain represents a secure vehicle by which parties can read, write and maintain a distributed ledger, the implication of this technology spans a vast range of markets.

Blockchain technology and the value it promises to deliver has, for years, been the object of hand-wringing at financial institutions across the globe, and for good reason. In an industry where security and accurate record keeping are paramount, it stands to destroy a significant amount of the value that banks offer their clients. Centralized financial institutions, acting as the middlemen who provide those assurances can see blockchain technology cresting the horizon. If you are Western Union, it is likely becoming harder and harder to find a good night’s sleep.

The creation and subsequent destruction of value will not be limited to financial institutions 

Blockchain technology affords stakeholders the ability to organize information in single, secure, distributed record keeping system. Because these records are so secure, they naturally lend themselves to automated transactions based on the records they hold. So, for example, if the blockchain reflects the completion of a transaction between two players on the supply chain, payment for that transaction could be immediate and automatically verified. This is where the true value of the technology begins to become market-agnostic.

If we take supply chain as an example, blockchain means greater accountability, visibility and security in the movement of goods. You can think of a transaction, in this case, as being the arrival of a package of meat at a specific location. Using an RFID tag, barcode, GPS tag or other locating device, the location of that package of meat is recorded at each step in the supply chain. By running data analysis on the travel path and duration, stakeholders in that supply chain can determine whether the product was in the wrong place, or that it remained in a location for too long (think refrigerated goods being left in warm environments). For a country like China, where meat smuggling causes serious health risks and a significant loss in tax revenue blockchain offers a solution. In fact, in 2015, over 100,000 tons of meat were smuggled into China, representing almost 10% of annual meat imports into the country.  As we know, the concepts of leveraging tracking and data analysis through location tagging aren’t new to the space, but the application of blockchain technology is.

Financial services and supply chain are two areas that have received increased attention with respect to blockchain technology, but its applications across markets should put a wide range of players on watch. In the energy space players like TransActive Grid, backed by blockchain disruptors like LO3 Energy and ConsenSys, are looking to break the mold. Using blockchain technology, TransActive offers a distributed marketplace by which generated energy can be bought and sold. Centralized power holding companies like Duke Energy, NextEra and National Grid are undoubtedly anticipating the impact this will have on their businesses.

For decades hospitals, clinics and other healthcare institutions have grappled with the ability to share and leverage data across systems. In an environment where accuracy and security dominate, closed islands of data represent stranded assets, constrained by the systems they live in. Electronic healthcare records (EHR) were never designed with an eye to the distributed architectures that are now being made possible. At companies like the Cerner Corporation, who’s EHR business accounts for over $2.5 billion in annual revenue, ‘protect legacy systems’ is the mantra. As industry incumbents toe that same party line, nimble startups like Gem are aligning with industry heavyweights to deliver blockchain-based enterprise healthcare management systems for the future of secure records management. To that end, in April of 2016 the Philips Blockchain Lab announced a partnership with Gem to collaborate on the development of their platform. In healthcare, as in a range of other markets, partnerships like these are forcing a change in the way established leaders think about paths of investment and growth.

How should we be thinking about this opportunity?

Thanks to Bitcoin, and early pilots by players like IBM and Intel, secure, automatic, peer to peer ledgers have caught the attention of growth minded business developers in a wide range of markets. From ride sharing to energy management, healthcare to voting, blockchain technology is forcing companies to consider what the post-middleman landscape will look like. Historically strong incumbents, like Amazon in retail, who have largely embraced and benefitted from the proliferation of smart systems and internet of things technologies should not feel safe. Disruptors have already leveled their crosshairs on the retail giants. One such player, OpenBazaar, aims to connect sellers and buyers directly, with a decentralized marketplace built on blockchain technology, and the investment world is taking notice. Over the last two years OpenBazaar alone has received funding from the likes of BlueYard, Union Square Ventures, Andreessen Horowitz and William Mougayar.

It is unclear which services will be added onto foundational blockchain technology by players like IBM to unlock its potential. Automated transactions, alerts in response to disparities from predetermined shipping routes or set temperature ranges, and other value-adding services will encourage large players to make the investment in the infrastructure to support this new technology and accelerate adoption. However, despite its promise, uncertainty around the adoption of this technology abounds. Mass adoption of blockchain will not be realized until peer to peer architectures are developed that facilitate its end use. Antiquated processing systems, data security concerns and firmly entrenched, antiquated, business models are conspiring to slow adoption. Today, we lack common communication standards and the ability for these devices and systems to process data at the edge. Furthermore, the process of retrofitting or overhauling legacy systems implicates a massive investment of time and resources for players who, for decades, have operated in relative comfort and isolation. As our environments become more and more distributed, command and control structures will diverge from the status quo as centralized systems become increasingly dispersed. Blockchain offers the ability to service the millions of data transactions that will increasingly occur on these systems of scattered nodes. At the center of this challenge sits a question: will traditional centers of power take steps to cede control of mission critical transactions to the devices that carry them out? To date, the crowd has remained largely silent.

We expect to see an increase in pilot deployment of this technology in the 2017 as large adopters begin to experiment with implementation. Financial institutions are aligning to develop platforms for use of blockchain technology, a movement we believe will grow in size and scope over the next 12 to 24 months. Pending the conclusion of pilot program, players like Walmart may lead a wave of adoption in the supply chain space. However, it will be the formation of true peer to peer architectures that provides the forcing maneuver for the realization of new, value-based, transactions in the marketplace. Regardless of the market, innovators are already asking how blockchain will fundamentally change their place in the world. These players will be poised for rapid change and are aligning to capitalize on the efficiencies blockchain offers. Laggards will find it increasingly difficult to compete with more nimble, efficient disruptors, and stand to lose a tremendous share of the markets they once controlled.

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