A new research report claims that, despite a huge amount of interest and investment in blockchain, the technology is still three to five years away from widespread commercial adoption.
The report, produced by global management consultants McKinsey, points out that in the past two years alone there have been more than half a million new publications on blockchain, and that Google searches of the term now deliver around 3.7 million results. Venture-capital funding for blockchain start-ups consistently grew and hit $1 billion in 2017 while initial coin offerings “skyrocketed” to $5 billion.
The report, written by McKinsey Australia, also cites World Economic Forum data that estimates that within ten years, blockchain will handle 10 percent of world trade and says leading technology players are also investing heavily in blockchain. The McKinsey report, entitled “Blockchain beyond the hype: What is the strategic business value?“, says IBM has more than 1,000 staff and $200 million invested in its blockchain-powered Internet of Things projects.
However, after evaluating the feasibility of the technology against more than 90 potential “use cases” the McKinsey report concludes that while “many companies are already experimenting, meaningful scale remains three to five years away.”
Blockchain’s core advantages, says the report, are “decentralization, cryptographic security, transparency, and immutability”. It goes on to argue that there is not one “singular form of blockchain” but numerous configurations that can “meet the objectives and commercial requirements of a particular use case.”
In the short term, Blockchain’s strategic value will mainly be seen in cost reduction. This means that public blockchains like Bitcoin, that lack a central authority, will be less successful than “permissioned blockchains” that are hosted on private computing networks and provide controlled access and editing rights.
The McKinsey report also takes time to provide a useful definition of blockchain. It explains that the technology is “a distributed ledger, or database, shared across a public or private computing network. Each computer node in the network holds a copy of the ledger, so there is no single point of failure. Every piece of information is mathematically encrypted and added as a new ‘block’ to the chain of historical records.” The system operates by introducing “various consensus protocols that are used to validate a new block with other participants before it can be added to the chain. “This,” says McKinsey, “prevents fraud or double spending without requiring a central authority. The ledger can also be programmed with “smart contracts,” a set of conditions recorded on the blockchain, so that transactions automatically trigger when the conditions are met.”
The strategic value of blockchain, however, will only be realized, argues the report, “if commercially viable solutions can be deployed at scale”. For this to happen, the technology needs a “functioning ecosystem… to achieve the critical mass required for a blockchain use case to be deemed feasible.”
For this level of adoption to occur, natural competitors will need to cooperate. “It is resolving this cooperation paradox that is proving the hardest element to solve in the path to adoption at scale,” writes the report. It goes on to conclude that there needs to be a set of common standards and clear regulations that create consensus on how the entire global system, its data, and investment, is led and managed.
“Overcoming this issue often requires a sponsor, such as a regulator or industry body, to take the lead. Furthermore, it is essential that the strategic incentives of the players are aligned, a task that can be particularly difficult in highly fragmented markets.”
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