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Blockchain maturity by 2021: What it looks like and how to get there

Posted: 1 November 2019 1:38 pm
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Can "innovation as usual" win the blockchain race or will some countries change tack?

On 25 October, president Xi Jinping emphasised the importance of blockchain as a central element of the next industrial revolution, urged for acceptance of blockchain as an important breakthrough, called for more focus on blockchain to accelerate its development and made it clear that government would be taking an active role in the technology's development and utilisation.

A flurry of activity followed. Guangzhou officials introduced a scheme to offer US$150 million equivalent funding for blockchain projects, and the reckoning on the street is that other local governments will follow suit. The national government passed a new cryptography law to help blaze a digital finance trail and the Communications Industry Association even suggested that 24 October should henceforth be Blockchain Day.

Nearby and at around the same time, Korea's Presidential Committee on the 4th Industrial Revolution recommended cementing the legal status of cryptocurrencies to better foster innovation, while Seoul, as part of its blockchain smart city efforts, pushed closer to the release of the local S-coin cryptocurrency.

S-coin is a prime example of how a government can actively promote blockchain through its own live testing, says Czhang Lin, CEO of the PIEXGO cryptocurrency exchange. It's one of few examples where a blockchain-based digital currency will hit the real world in a way that millions of people will interact with it.

"I think this tool (S-coin) will set a good example for the rest of the region to follow, as well as other countries," he said. "I think it will be a very good trial test, because with S-coin we're talking about Seoul with a large population size, so the test pool is much larger... if they can succeed with Seoul's population segment, together with governmental actions, it can really set a good example for many other regions, not just in Korea."

Almost everywhere you look, there's a blockchain arms race vibe in the air, where different countries are competing to be the first to roll out live, widely-used blockchain systems.

But not all efforts are bearing similar fruit. Even in Singapore, widely known as South East Asia's fintech hub, there's still a vast gulf between blockchain in theory, real world use of blockchain in specific applications, and a blissfully efficient state of complete blockchain-ification.

"Let's take Singapore as an example," Czhang said. "Singapore has been working on blockchain and created a [regulatory] sandbox earlier last year... the government even then said they wanted to do an initiative of doing Singaporean dollars on the blockchain... However, I think the process is much slower for some reason. It does not have too many cases that were able to get into the sandbox and exit successfully."

"I think that a different approach, where governments are more determined to move forward to proof of trial... will bring results faster than the sandbox can do in Singapore," he added.

South Korea's approach with projects like S-coin "will bring results faster than, in this example, Singapore" Czhang suggested. "They did speak a lot, but yet after all this time, has not seen any determined leap forwards, from top to downstream."

But why is that? What's the difference between seemingly similar pro-blockchain approaches? Why might sandboxes, tax incentives and similar techniques for encouraging private sector innovation fail where more direct involvement succeeds?

Public vs private sector blockchain

Blockchain innovation and live testing in China and South Korea is government-driven in many places. It's a sharp contrast with the United States, where the general perception is that the private sector does the innovating while the government babysits to make sure it doesn't burn down the house.

And a glance at the thriving commercial blockchain space would suggest that business is good. Surveys find a very high level of business interest in blockchain, a number of industry associations are forming around blockchain and every day brings news of some large company exploring or adopting the technology.

But there's also an argument to be made that leaving blockchain innovation to the private sector doesn't give the pace a country needs to get ahead in the blockchain race, or lead to developments that adequately leverage blockchain's unique features.


Blockchain's chicken-egg problem is hard

Blockchain's most widely-discussed issue is scalability. But maybe it's only so widely discussed because Bitcoin and Ethereum, the largest public blockchains with the most users, are currently encountering this problem, rather than because it's the biggest or toughest problem.

We can see this from the fact that scalability does not equal more public blockchain users. Ethereum remains packed to the gunwales, while a new generation of theoretically scalable and decentralised public networks remain largely untouched and fighting for attention in a purely speculative market.

They remain largely untouched because they're still largely untested. They remain largely untested because they're largely untouched.

Clearly blockchain adoption is not as simple as "if you build it they will come". The technology is at its most useful when it's seeing mass adoption of some kind, whether that's across an entire industry, an entire supply chain, or an entire continent.

This is blockchain's chicken and egg problem: a blockchain needs to hit that critical mass of users before it's useful, but people won't use it until they see that it's useful. They won't use blockchain until it's tested, but you can't properly test it without people using it in some fashion.

By directly creating or commissioning its own large-scale projects, a central authority can more quickly make an experimental omelette out of the chicken-egg problem than a gently-motivated private sector can.


Useful ≠ profitable

Something is only useful to a business if it's profitable. By counting on market forces to uncover use cases, you're left with a lot of gaps, where even the most obviously beneficial blockchain solutions won't be adopted.

And even if it's profitable for one business, that doesn't mean it's profitable for all the other stakeholders that need to join the system for it to work.

Why Walmart's food safety blockchain happened

Consider the Walmart food safety blockchain. It's a massive step forward in food safety, saving lives, cutting costs and generally being all pro and no con. It's a blockchain that tracks food across an entire supply chain, from farm to supermarket, involving every participant along that chain.

However, most participants in this supply chain don't have any reason to start using a blockchain. Farmers, logistics companies and everyone else has to follow food safety regulations regardless of any blockchain wizardry. For them, the technology appears to be all cost and no direct benefit. But for the produce seller, it's a different story. The myriad costs of an outbreak – brand damage, lost sales, etc – disproportionately lands on them.

A food safety blockchain can save lives and improve efficiency. But despite being as clean a use case as you'll ever find, it takes a very specific set of circumstances to bring this to life as a private sector enterprise.

It would not have happened if Walmart didn't have enough clout to mandate that all its food suppliers start using the blockchain system, and announce that it would stop dealing with any suppliers who didn't use it. It also may not have happened if Walmart directly own a large part of its own supply chain, by having its own truckers and fleet. This meant Walmart didn't have to convince a bunch of trucking companies to get on board with its blockchain.

The food safety blockchain is one example of a blockchain solution that won't organically grow in most places, without some kind of authority – whether it be Walmart, an industry association or a government – mandating that it should be so.

By leaving the private sector to work out where blockchain works, it will only grow in places where it's profitable. This isn't the same as the places where it's useful.


Competition among blockchain providers may restrict adoption

It's often said that competition breeds innovation, and there's a mountain of evidence saying it does.

But we can also see how competitive dynamics in blockchain could be preventing adoption, thereby restricting innovation.

In the enterprise blockchain space, many ongoing developments are kept under wraps for fear of attracting sales vultures and to avoid giving away potentially sensitive information. This secrecy naturally makes it tough to build that required critical mass of blockchain users, and set meaningful standards in the space.

Public blockchain projects tend to be a bit more transparent, but you still get similar counter-productive competitive dynamics as the fickle and frenetic cryptocurrency markets can prevent competing projects from working together, even if it's just to establish some standards for the blockchain industry.

There's also the fact that the technology moves so fast, and the "cutting edge" is a moving target.

It doesn't make sense for a business to put down roots on a blockchain that might be obsolete two years from now, especially when you have no guarantees that all the work you've done will be in any way portable or easily-replicated on whatever infrastructure comes along in the future.

The natural tendency of a purely commercial blockchain industry, on both the provider and user sides of the fence, is to endlessly wait for the next best thing while complaining that no one's actually using blockchain.


The ticking clock

Many of these factors wouldn't be so much of a problem if it weren't for the fact that there's a ticking clock hanging over the development of blockchain.

Firstly, because it's a foundational technology which underpins many other areas. As Xi Jingping said, per the Xinhuanet state news agency:

"[Xi Jinping] pointed out that the application of blockchain technology has extended to digital finance, Internet of Things, intelligent manufacturing, supply chain management, digital asset trading and other fields."

If you want to let AIs make digital currency payments for services rendered over an IOT network, you're going to want blockchain. If you want to better protect personal data and distribute the wealth created in the fourth industrial revolution, you're going to want blockchain.

And if you want to allow the creation of revolutionary small businesses that can do with two people what previously took ten, thereby opening the door to entirely new business models, you're going to want blockchain.

And secondly, because it's a race.

Eyes on the prize

A large part of the issue comes back to standardisation as one of the main problems blockchain will have to overcome before it can achieve the scale needed to unlock many of its most useful applications.

Consider efforts to digitise medical records with blockchain in Korea, Czhang suggests. An individual medical centre can start using blockchain, but if it currently uses a different system to other hospitals, it's that much harder to get everyone onto the same blockchain-based system.

"The larger issue with medical centers is that each region, and that includes even different hospital systems, might have a different data structure," he said. "And I think in order for [blockchain] to work well, it is required for the government and the medical health sector to set down some guidelines for the country, or even say for a larger region, to follow."

You can't (and really shouldn't) set down these guidelines without a lot of testing under your belt.

You'll find similar issues in every sector, such as energy or financial services, Czhang notes.

"The fundamental question is whether data structures use similar rules. I think this is something that each region will eventually evolve into, in order to provide a greater service for all citizens and people in general."

It's going to be a gradual process though, as companies and entire industries standardise with each other in a blockchain-friendly way.

Beyond the direct economic benefits of reaching this point, the reason it's an arms race of sorts is because a region that reaches this level of "blockchain-ification" early has a better chance of exporting its standards to neighbours.

"Once South Korea gets it over, and develops new standards, soon after other regions can follow... growing from Seoul and then to Busan, and then down to the whole country, [South Korea] can soon lead by example and sell its technology, and even experience consulting, to other nations that have close ties with South Korea, and need some Korean relationship business development. I think it is very smart, and a very good move for South Korea to do so."

These standards may be able to spread quite naturally, with a minimum amount of encouragement.

For example, if you have two countries with a lot of cross-border trade there will be enormous benefits to getting both on the same blockchain system and reaping the benefits across trade finance, cargo tracking, insurance, cross-border payments and everything else that goes into trade. If one of those two countries has live blockchain standards in place, businesses in the other are more likely to pick up those standards.

As Xi Jinping explicitly said, if or when China takes the lead in blockchain, it will have more power to set rules and standards internationally.

These types of regional standards will emerge and spread, Czhang suggested, and could then be tied together by interoperability further down the line.

Timelines

A state where blockchain is a ubiquitous type of technical infrastructure in South Korea will "actually happen very soon" Czhang reckons.

Looking at current large-scale projects like S-coin, "I believe by the year 2021 - after one and a half years, or even two years of trials - they will have a much more matured structure [with more] applications and results."

But none of that is to say South Korea will be the first country to reach this state of "blockchain maturity", Czhang noted. Nothing is set in stone, and this is an area where smaller countries have a tangible advantage in the form of less infrastructure to upgrade.

"Many other nations are of a smaller size where it's much easier to change the infrastructure and to upgrade, such as Singapore and Estonia," he said.

It's a bit ironic, given blockchain's focus on decentralisation, freedom and personal control, that the most decisive progress in real world adoption may be achieved when central authorities deliberately engineer a great leap forward significant jump ahead.



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Disclosure: The author holds BNB, BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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