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The blockchain revolution is here. The long technology associated with Bitcoin is now used to make businesses as varied as commercial finance, video games, travel insurance and the most efficient and safest diamond extraction.
The blockchain revolution is also very far. If it ever will come.
Partnerships and initiatives with blockchain seem to be flaunted every day. Projects that actually solve real-world problems are much rarer. The research firm Gartner interviewed 3,160 principal information managers this year and found that only 1% put the blockchain in business.
Take Australian mining giant BHP Billiton, who announced in 2016 that it will use blockchain to track the supply chain, including the movement of rock and liquid samples. But after the company tested it in a pilot project, a BHP executive said this month that the technology "has not reached the point of maturity in which we think it applies to us."
As technology achieves what Gartner calls "peak inflated expectations," executives and investors must learn to evaluate the exaggeration of real potential.
Companies that are not already considering how to use the blockchain to restructure their operations, particularly in finance and logistics, risk their software – and even their business models, which become obsolete.
"We see this as a transformation in the same way that the Internet has changed communication," says Marie Wieck, general manager for blockchain at IBM, which has more than 1,500 staff members working on technology.
However, it's a bit like trying to choose the future winners and losers of the Internet in the early 90s. Tomorrow & # 39; s Facebook – and its Pets.com – are not yet visible to the horizon.
What is this technology that has such enthusiastic supporters? A blockchain is a database managed by software that collects information, protects it by encryption and stores it on participants' computers.
Similar to a ledger, it allows its participants to interact with each other without the use of a central intermediary. As a result, transactions can be executed faster and cheaper.
The absence of an intermediary is key to the potential of the blockchain, says Brian Behlendorf, executive director of Hyperledger, a branch of the non-profit Linux Foundation that has become a central player in the development of blockchain
"Blockchain is not a technological solution to a technological problem," he says. "It's a technological solution to a political problem, a political problem in the business world, you do not want a PayPal or an eBay or a Uber or a Facebook at the center of many markets, because this gives enormous power to those entities, more than it was probably AT & T when it was at the center of the telephony market. "
The lack of central authority can also be an obstacle, however. Blockchains used by companies tend to be authorized: participants must demonstrate who they are and their access to information is limited according to their specific needs. Reaching competitors to agree on conditions can be difficult.
Today, technology is growing largely through consortia that allow companies to share the cost of software development and ensure that they are building systems that will be compatible with each other. [19659004] These efforts have shown how the blockchain can standardize business processes that are still largely paper-based or using obsolete technology and how it can fill gaps in areas where trust is a problem.
Blythe Masters, former executive of JPMorgan Chase who is now CEO of Digital Asset Holdings, sees inefficiencies in transactions and record keeping as a rich opportunity for blockchain.
"Fifteen years ago, if someone had told you, we will see the advent of self-car in the streets before seeing the T + 2 settlements [trades getting settled two days after they take place] and before you can walk from a doctor's office to the other and get your health documents preceeded from there, you'd have been declared crazy, right? "Masters says.
"Those are the kinds of delays and extraordinary inefficiencies that have plagued financial services and big businesses in other sectors like health care." You saw an extraordinary revolutionary speed in the Big Tech industry and not Have you ever seen elsewhere in the company, this is where this is going, and so what fascinates about this is the breadth of potential for applications. "
Blockchain will generate a commercial value of $ 5 billion in 2018, Gartner estimates. The value will grow, but it is likely to remain modest for years, before rising more impressive over a decade from now, surpassing $ 3.1 tn in 2030, says the company. This is more than Britain's entire annual economic output today.
Some blockchain executives giggle nervously when presented with that number. One fell silent, then he joked that he would put him in his deck of investors. Others are more likely to embrace the number.
The $ 3 tn figure "does not seem crazy to me," says Masters. His company has won a contract to redesign the clearing and settlement process at the Australian Securities Exchange using blockchain. "When you think about the potential addressable market here, it does not look crazy at all."
For investors, there are a few ways to invest directly in blockchain. Some exchange-traded funds have been introduced, including Amplify Transformational Data Sharing, Nasdaq NexGen Economy Reality Shares and NextGen Protocol Innovation Shares, but offer minimal exposure to real income to technology, which currently generates little revenue.
Big companies – especially IBM and Microsoft – have invested heavily in the development of blockchain. Neither company bursts its blockchain-based revenue into public financial documents, and does not share data with Barron .
WinterGreen Research, a Massachusetts company that tracks technology trends, estimates that IBM and Microsoft together control 51% of the blockchain market, which together generated revenue for $ 706m last year
" I think we are more distant, "says IBM Wieck, who has worked with more than 500 clients.
Some early blockchain success stories were not created by technology giants, however. AXA, the French insurance company, uses blockchain technology to transform the insurance sector of flight. His product, called Fizzy, allows flyers to buy an insurance that pays immediately if their flight is delayed by more than two hours, for whatever reason.
"Blockchain is useful because it allows me to tell the customer that you do not" I must trust the insurer on the data we are using ", Laurent Benichou, founder of Fizzy, says Barron & # 39; s .
"Your politics is on the blockchain. AXA publicly undertakes to compensate you if you are eligible. Because an intelligent contract is causing compensation, the client can know that we are honest with the data we use. Potentially, for a paranoid customer who assumes to cheat, we say that it is no longer AXA which is a part of the transaction that will decide if you will be compensated. "
The project, which registered about 11,000 transactions so far, did not do much to change the short-term financial outlook for AXA, which posted revenues of 98.6 billion euros (112.5 billion dollars) last year But Benichou expects airlines to start offering this kind of service more extensively to customers in the years to come, and "when they do it will be a huge market."
Also, he thinks it can be used more ample to insure against different types of events.
"We could do a Fizzy for weather forecasts; we could do a Fizzy for pollution. Whenever we have an open data set, we are able to make a variation of Fizzy. "
Blockchain technology also proved useful in other transactions where trust issues previously hindered the market.
In India, small businesses were looking for a way to get pending bills from other paid companies The lenders had previously been cautious in financing these transactions, partly because of the risk of double billing, that companies would receive funding from multiple banks for the same transaction.
But a New York company, MonetaGo, has designed blockchain software that records invoices and tracks transactions that have already been financed The blockchain records transactions without revealing details about them that could erode the competitive positioning of the companies involved.
The project has been operational since March and the business has grown steadily, says Jesse Chenard, CEO of MonetaGo. Go can earn around $ 20 million per year in India. The system has been adopted by major industry players in India.
"We have introduced a possibility for financiers to securely share data they would never have shared before," says Chenard. "To share them first, they would have to share the details of those invoices, and no one would ever trust the other to not look at the competitor's information." Taking on a third party to oversee the invoices for all the financiers would have been "cost-prohibitive", he adds.
"When we started in India, we said," We are a blockchain company, we can do anything with blockchain, "he says." The worst part to get in and say, "Hey, I'm a blockchain company & # 39; is that they send you to the innovation team. And as far as people like IT are concerned, it's a cost center. "
Now" our pace is completely different. We ask to speak with the person responsible for the finance of the trade and to say: "Would you like to reduce fraud on credit financing?" The answer is almost always yes. "
The cost has blocked the adoption of the blockchain Some of the existing players in the industries may have to accept lower returns in the future if they adopt the blockchain – a perspective that makes the blockchain a threat as much as an opportunity.
"This technology threatens profit margins across the board," Behlendorf of The Hyperledger argues
International Data Corporation estimates that companies will spend $ 1.5 billion in blockchain this year, twice the amount of last year, but even companies that believe in technology are reluctant to spend too much, because they have no guarantee of returns.
"Blockchain challenges what you do rather than amplify what you do, "said Rajart Kandaswamy of Gartner." Technologies like cell phones amplify what you do. The cell phone was an additive for banks. Blockchain as an underlying technology makes you rethink your business processes or even your business model. It will take years before people pass. "
The companies that invest most in blockchain projects are often central players in the industries in which they operate – some of them could be considered intermediaries that the blockchain promised to remove.
Broadridge Financial Solutions, a major player in proxy voting sector, spent about $ 150 million on blockchain and voted by proxy for the annual Banco Santander meeting on the software, according to CEO Rich Daly Nasdaq used it to allow transfers of shares of private companies, among other applications
The decision of the Australian Securities Exchange at the end of last year to rebuild its equity equity system using blockchain technology could lead to other exchanges of similar software. it could allow transactions to be concluded faster than the current two days when it comes into service in 2020 or 2021
In the United States, another central intermediary is updating its software on a blockchain platform, and expects to go live
The Depository Trust & Clearing Corporation, or DTCC, a holding company that solves and cancels the overwhelming most of the financial exchanges in the United States, is building a blockchain-based system to record the 15 million transactions on credit derivatives is processed on an annual basis.
The system, now run on a more expensive mainframe run by DTCC, is projected to go live with its first phase of the blockchain project in the first half of next year.
The industry saw the value of the ledger distributed in terms of verifiability and sharing of data among participants on a synchronized basis almost in real time, "says Jennifer Peve, co-head of the office of DTCC's financial strategy: Blockchain will end up offering participants a "single source of truth on the network" that will make transaction reconciliation easier.
However, Peve says there are limits to technology. replace the DTCC clearing and settlement equity software, for example, because it is not yet able to process about 100 million transactions that pass through the system every day. "It will take some time before it can support those volumes, "he says
Even major banks are exploring blockchain through other avenues, even if they are the early days of most projects – a private company called R3 he built a blockchain software called Corda Enterprise that allows companies to trade syndicated loans, among other possibilities.
JPMorgan Chase developed its own software called Quorum, built on the Ethereum public blockchain, designed to reduce documents and time lag in financial transactions. The software, which can be downloaded from the JPMorgan website, is rather unusual for the bank, whose managing director, Jamie Dimon, has defined bitcoin as a "fraud". Dimon then admitted that "the blockchain is real" and is clearly cutting out a niche for the bank.
The way these many blockchain projects work together remains a mystery. RA. Farrokhnia, executive director of the Columbia Fintech Program, says that blockchain "still needs its Cisco", referring to the company that built today's Internet switchboard. (Cisco Systems, as it happens, is working on blockchain, but apparently it's not the "Cisco" of it.)
IBM wants to stay at the center of many of these partnerships. In the banking sector, one of the most ambitious projects IBM has worked on is a trade finance consortium in Europe called we.trade. Deutsche Bank, HSBC and seven other banks are leading the project, which went live in June with seven transactions in its first five days.
Commercial financing: banks lend money to businesses that cross-border can take a week or more for transactions to be canceled. With we.trade, trades can be adjusted in real time once the transaction conditions are met.
There is no guarantee that any platform will become dominant. HSBC also entered into commercial finance agreements on the blockchain Corda and Barclays completed the negotiations with another start-up company.
Finance attracts most of the securities in the blockchain world, but the greatest long-term opportunity could be in supply chain management, which are now drawn on pieces of paper, Excel spreadsheets and incompatible IT systems . The Danish giant AP Moller-Maersk is working with IBM on a project called TradeLens that will digitize and standardize shipping documents and place them in a blockchain database.
"The documentation is now everywhere," says Peter Levesque, Managing Director of Modern Terminals, which manages the shipping terminals in Hong Kong and mainland China and has joined the Maersk project. Some shipping operations still depend on fax machines, he notes. TradeLens takes all the data that the company keeps track of in different formats and "puts everything in one place".
Blockchain, he says, "will not change our operations, but will make our operations more efficient, because we" will have better ship planning and better anchoring planning just by having more data first. "
The food supply chain is also a juicy target for blockchain entrepreneurs, because it identifies the original source of a food product – contaminated romaine, for example – may take days.
Walmart, Nestle, Dole Food and others companies are building a platform with IBM called Food Trust that will put the entire food supply chain, from farm to supermarket, onto a blockchain that supposedly can trace the entire chain in seconds.
Software can now tracing about 50 products, far from the entire supermarket, but enough to have an idea of the feasibility of the software.
This includes more than following a lettuce head since it is transported by truck ross the country; It has been tested on more complex activities, such as keeping track of all the ingredients in a container of Gerber baby food, mashed potatoes and apple puree and pumpkin. [1 9659004] IBM says it plans to start offering software for sale to the public in the next few weeks. The product is packaged as a cloud-based subscription service, assessed based on the size of the company. For small businesses with revenue less than $ 50 million, the cost is $ 100 per month; for larger ones, the price rises to $ 10,000.
Despite the efforts of companies like IBM, it is probably a mistake to think that only Big Tech will dominate the blockchain technology. Blockchain can be separated from the cryptocurrency, but the entrepreneurial spirit behind digital coins is also present in the field.
One of the most important consortia developing the technical standards of the blockchain, the non-profit Enterprise Ethereum Alliance, wants to involve smaller actors, says its executive director, Ron Resnick. As with any modern technology platform, the value of the blockchain will be determined by the utility of the apps that end users can access.
Small businesses "are driving this," says Resnick. "They can move faster than a bigger company."
Large risk-averse companies such as Royal Dutch Shell are in the Ethereum Alliance, but the organization also has members of the world of cryptocurrencies. The big oil companies will not issue digital coins at any time, but the alliance connects them with developers focused on building open-source public products.
This world will also influence the development of blockchain. AXA is investigating whether cryptocurrencies can further accelerate its Fizzy product, and DTC's Peve hopes the open source community can solve the problem of blockchain resizing, for example.
"Never underestimate a motivated child", says Amber Baldet, who ran The blockchain division of JPMorgan before he left he co-founded his blockchain company called Clovyr at the start of this year.
"It is not just the requirements of institutions that seek to transform their existing business model into a new technology, it is working together with some real destructors and is able to benefit and take its cue from truly new innovations. . "
Baldet adds:" Some of the innovations are the scams that offer initial tokens and some are bad ideas, but somewhere there could be completely revolutionary business models and brand new products. "
This article was published by FN's sister Barron & # 39; s
Write to Avi Salzman in avi .salzman @ barrons.com or follow @avibarrons on Twitter
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