Blockchain is everywhere: keynote speeches at conferences, Google search, trending video, and even your favorite gym. But is this just hype, or is there real value in blockchain development?
Well, opinions vary across the board. US economist Nouriel Roubini calls Bitcoin “the bubble of all bubbles” and says that blockchain has been around for the last ten years with very little to show for it. Warren Buffet calls blockchain a “mirage.” He also says that “the idea that it has some intrinsic value is just a joke.”
Is blockchain overhyped? These claims are often met with skepticism, since even governments all over the world are jumping on the bandwagon and adopting the tech very fast. You may also calm yourself down with the fact that, after all, Buffet was wrong about the internet stocks bubble in the 90s, and the success of companies like Amazon, Facebook, and Google proved him totally wrong.
But don’t turn that “noise” off just yet. It’s easy to dismiss criticisms of blockchain as just “hate” or a counterreaction to overhype, but Gartner has dropped the bomb on this hot issue when it evaluated blockchain’s position in tech hype cycle under the “peak of inflated expectations” and said that blockchain was headed for an inevitable “trough of disappointment” — where it landed in 2019.
So who is right?
Experts say that blockchain as the underlying infrastructure is not overhyped, but aspects of the crypto-industry, such as cryptocurrencies, will see big losses or complete transformations in the future. When it comes to disruptive technologies like blockchain, separating the hype from reality can be hard. Let’s look at what you have to be aware of.
If you are not using blockchain, you are missing out.
Since its first introduction to the world as the technology behind Bitcoin, blockchain has never been out of the constant hype loop. This resulted in utter confusion about blockchain's potential and limitations. In the last twelve years, the public opinion on blockchain has varied, from it being a tool for cybercriminals to a global panacea.
The normal cycle of awareness was tarnished by news articles filled with buzzwords calling for action. From blockchain enthusiasts to C-level executives, everybody was trying not to miss the boat. In reality, though, there is simply no boat.
There is no doubt that blockchain can revolutionize the majority of industries. However, as with any other business opportunity, enterprises first need to decide on an implementation strategy, find a use case, develop an MVP, etc. The reasonable business approach is a vital missing ingredient in blockchain adoption.
Blockchain’s global adoption is around the corner.
Currently, blockchain is on its complex path to maturation. Experts’ opinions greatly differ, but it’s safe to assume that the technology needs at least five more years to hit the mainstream. There is a plethora of reasons for that:
Interoperability. Over the last few years, numerous blockchain platforms, protocols and standards were created by different companies with different purposes. Unfortunately, the majority of blockchain networks work independently from one another. Although the term blockchain interoperability has lately been popping up, developers still tend to tailor the technology to narrow industry-specific use cases. Despite this being a logical answer to a particular problem, such practices impede blockchain from being interoperable, thus hindering it from reaching its full potential. The lack of standards presents a huge technical challenge for blockchain to become globally adopted.
On paper, the financial industry is a perfect area for blockchain to shine. However, banks and other financial institutions heavily rely on decades-old standards that allow them to near-seamlessly share information with each other. It will take a significant amount of time for industry leaders, technologists, and independent advisory companies to figure out how to achieve this level of interoperability with blockchain.
A proof of concept guarantees success.
Research conducted by the World Economic Forum and Accenture in 2019 reveals that companies usually expect around 24% ROI in their blockchain initiatives, but achieve only 10%. Moreover, the hype around the technology has led 42% of the surveyed companies to expect a significant improvement to their brand image when implementing blockchain. In reality, less than 10% of companies are able to move from the testing phase to deployment.
Why is that? Due to the infancy of the technology, there are multiple unpredictable factors that can hinder success. First, most proof-of-concept (PoC) projects are led by blockchain enthusiasts and R&D teams in controlled environments. While they can certainly prove that the technology works, they can’t guarantee that it will not fail.
Second, blockchain implies cooperation. Until now, PoCs were all about testing the technology, but when it comes to blockchain, a thought-out combination of legal architecture and operational construct is what defines success. Traditional PoCs can’t ensure project viability. The technology has to be tested at scale, which implies multiple companies working together. This leads us to the third major hurdle.
In many cases, direct competitors within a particular industry need to collaborate to realize the technology’s full potential. Forming such alliances that can involve up to twenty enterprises is a very complex task, to say the least. It will take a few more years until organizations find ways to build healthy relationships and establish collaborative ecosystems.
However, 2019 has seen a step in the right direction in this regard. Most notably, the blockchain-based IBM Food Trust network managed to bring together food industry giants including Walmart, Nestle, Unilever, Kroger, Tyson Foods, Carrefour, and others.
Blockchain is volatile because Bitcoin is volatile.
Despite the fact that most people know by now that Bitcoin does not equal blockchain, there is still the poor understanding of the technology and its implications. According to Forrester, blockchain should be viewed as “a technology concept or architectural principle.” Of course, blockchain tech is currently tied to cryptocurrencies but that doesn’t mean that if Bitcoin crashes or disappears completely, blockchain will perish as a concept.
NYU professor of corporate finance and Wall Street’s “dean of valuation” Aswath Damodaran says that just like with the dotcom bubble in the late 90s, everyone knows blockchain is the future, but it’s unclear how exactly this technology will shape it. In the 90s, internet companies were priced, not valued, just like crypto-commodities nowadays. Blockchain will acquire a true value only with its widespread adoption.
Blockchain is immutable.
The immutability of blockchain is exaggerated. Even though the ‘write-once, append-only’ principle is its strong point that adds a level of assurance, blockchain data can still be rewritten through hard-forking of the chain. This is what happened in 2016, when the Decentralized Autonomous Organization, which was built as a fund for Ethereum-based projects, was hacked, resulting in $40 million stolen.
To refund the DAO investors, the majority of the community voted for a hard fork, which made previously valid ‘immutable’ blocks invalid. While it was probably the best decision at the time, such outcome provoked a wave of skepticism around blockchain security. There are two general opinions on this matter. The first one is that any kind of interference with blockchain contradicts the fundamental idea of the technology. There is an opposite view, though:
Hard forks are the most democratic means of consensus on earth today. They are the ultimate referendum mechanism.
The DAO hack proved that blockchain can’t completely eliminate the human trust factor. In fact, there is no technology that can. Regardless of how fair the system is, there will always be the need for human interference as well as the need to make permanent changes to the rules. Again, mass media likes slapping a label on everything, so it portrayed blockchain as an immutable fortress, which proved wrong very soon.
Blockchain will most likely continue to mutate and adjust to specific conditions. Rapid changes to today’s blockchain blueprint are inevitable. Gartner predicts that by 2021 90% of all enterprise blockchain platform implementations will have to be replaced within 18 months.
Blockchains are decentralized and help businesses ditch intermediaries.
Blockchain networks are not entirely decentralized, nor are they free from intermediaries. Blockchains are distributed networks that retain a degree of decentralization, but Forrester’s 2018 research on the blockchain myths hints that there is central control, represented by miners and development teams as well as the code itself. When it comes to intermediaries, the current ones may change dramatically as the adoption widens and standards appear. These emerging intermediaries include wallet providers and cryptocurrency exchanges, governing bodies, and regulatory frameworks.
Blockchains are secure.
In theory, blockchain is indeed a superior technology in terms of security. However, the DAO case has already proven that nothing is 100% secure. Let’s look at the most significant blockchain security issues.
Bugs. Any blockchain network is based on code, which inherently makes it vulnerable to flaws. Any new code update might be the last if done poorly. For example, Ethereum, the world’s second most popular blockchain, was one step away from falling into oblivion. ChainSecurity, a smart contract audit firm, found a major security vulnerability in the code just two days prior to a large update release. The bug could enable hackers to reenter the function infinite times, allowing funds to be withdrawn forever.
The 51% threat is a potential attack on the blockchain network where miners can control more than half of the network’s mining hashrate. In this situation, hackers have the power to reverse transactions, thus allowing double spending.
In the beginning of the blockchain saga, the 51% attack was considered as a strong sign of blockchain immutability to cyberthreats. However, the cases of well-executed 51% attacks continue hitting the news. In January 2020, the Bitcoin Gold (BTG) blockchain lost $70 thousand to a group of hackers, which marks the second time BTG has been attacked in the last two years.
A few other blockchains have been targets of 51% attacks in the past years, including Ethereum Classic, Verge, and Vertcoin. All of them have one feature in common — they use the proof-of-work consensus mechanism, which proved to be way more vulnerable to such attacks compared to blockchains based on proof-of-stake.
However, the larger the blockchain and the more distributed the network, the stricter security you will get as a result. Blockchains do allow catching unauthorized record changes to applications that are developed on top of them. But security principles will have to continuously evolve to counter the ever-changing threats and vulnerabilities.
So has blockchain been overhyped in the past ten years? No doubt. However, it doesn’t imply that blockchain provides no value. The hype era is mostly over, and blockchain is slowly transitioning from being a mere tech buzzword to the globally recognized technology with a transformative potential.
The problem with the hype around blockchain was that media tended to portray this technology as an alien tech created by mysterious Japanese figure that would instantly change how every industry operated. This created a sense of urgency among business leaders to somehow adopt the technology, which led to many of them failing. The technology was yet to be understood when journalists rushed to conclusions.
In reality, blockchain should be implemented with a measured and pragmatic step-by-step approach. There is no more room for unrealistic expectations and blind dives into the unknown. Here, at Itransition, we highly advise enterprises to entrust the analysis of a particular blockchain use case to experts in the field. Alternatively, companies should establish expert teams responsible solely for blockchain R&D and implementation.
However, it’s important to acknowledge that those who are planning to strategize upon success of their competitors in blockchain adoption are likely to be left behind. As it was with Amazon or Google, first-mover advantage is what made them conquer disproportionate market territories. There is a thin line between recognizing immense potential of being the first to adopt a technology and the high betting on the unknown. First-mover advantage can be a key factor in success, but maintaining the use-case focus is crucial regardless of the industry and conditions.