[Why Big Tech Firms Are Ignoring Blockchain (For Now)
Rapheal Charlton
In 2009, a previously unknown cryptographer by the name of Satoshi Nakamoto introduced a mysterious new digital currency to the world. Ignored by the traditional finance industry, Bitcoin gained popularity quietly on the Internet and now is considered the first mainstream cryptocurrency to be heralded as the biggest innovation in finance since the invention of the double-sided ledger. The comparison is no mistake, cryptocurrencies can be considered the re-invention of the ledger into a public ledger, once the exclusive playground of banks and governments. The power behind cryptocurrencies is blockchain technology, an equally mysterious concept that can only exist in a world of cheap high speed computing power and ubiquitous Internet.
In its current state, many leading companies and governments explore demonstrations of the blockchain integrated into finance, supply chain, identity management, credential validation, property exchange recording, and other verticals. In most of these cases, the proof of concept demonstrations are indicative of the possibility and promise, but have yet to be deployed in meaningful or scalable manner.
One of the main reasons why true adoptability of blockchain technology has been slow is because of the uncertainty in policy. Firms and organizations are waiting for political decision-makers to clearly state how rules and laws related to tax and financial exchange will affect the technology. So far, we have witnessed the earliest forms of actual blockchain implementations in applications that involve compliance. In these cases, the value of immutability, decentralization, and transparency are the most significant. We expect security applications to be the next area where significant adoption will take place. There is also a general trend in all industries and governments, where slow but steady acceptance of blockchain technology is taking place.
We expect the gradual development of a globally transparent ledger which will become the backbone of many new applications. Blockchain technology today is in its infancy, but for institutions, states, and companies alike to ignore this technological revolution would be equivalent to ignoring Internet technology when it emerged 25 years ago. We expect many researchers and firms to compete and work on algorithms, technological improvements and infrastructure that can offer the blockchain promise in a scalable, yet secure manner. We believe that it is crucial for institutions, organizations, and governments to be part of this groundbreaking development and research.
For blockchain technology to transform industries and everyday lives of people there is a lot of technological development still to be made. We would like to compare this to the development of the original Internet that allowed a certain number of applications (i.e. web browsing, email, information sharing, etc.). This first iteration of the Internet (Web 1.0) was made possible by open protocols developed by researchers. The true Internet economy that we are witnessing today emerged from the second layer of the Internet, namely interactive and social applications (Web 2.0). This second wave of Internet companies included Facebook, LinkedIn, Instagram, etc. that thrive on human exchange and interaction.
In a similar way, we expect a wave of blockchain solutions that will solve a new set of social issues to disrupt the current world order. Thus, it may not be enough for people to simply have direct access to the primitives of a global blockchain ledger. We believe that as the current set of issues with blockchain protocols, scalability challenges, and standards are resolved, blockchain will deliver impact on societies and people all over the world, creating new winners and losers. This is the horizon we would like to explore and that is what we consider as the next stage of blockchain.
Two important features of blockchain are that it is distributed and decentralized. A traditional database, which lacks those qualities, is known as a centralized database. For example, when a professor records all student grades in one database, that is a centralized database; the professor is the only person with a copy of the database and the only person who can make changes to it. Students trust the integrity of this database because they trust its centralized figure (the professor). Conversely, without a trustworthy centralized figure, the record itself becomes untrustworthy.
Blockchain eliminates the need for a trustworthy centralized figure. Since it is distributed, there are multiple copies of the same database. Since it is decentralized, different people on the blockchain network can make changes to this database, which will then be propagated to all other databases. When there is inconsistency among different copies, majority rules, making it extremely difficult for anyone to alter the blockchain. The end result is an immutable and trustworthy database.
Blockchain can also be used to encourage eco-friendly consumption. BYD, an electrical vehicle company in China, has set up an ecosystem composed of environmentally friendly firms from different industries. Within this ecosystem, customers can collect and redeem points which encourage more consumption within the green environment.
For this reason, leaders need to think not just about current challenges and developments, but about what their industry could look like 5 or 10 years from now. Blockchain is still a relatively new technology. Investing in it now would be a high-risk, high-reward decision. That said, the technology is mature enough that many established brands, like those mentioned above, are already capitalizing on it. Companies that wait for this technology to stabilize risk becoming followers (low risk, low reward) or, worse, becoming irrelevant.
We recently hosted a livestream on this topic (you can listen to a podcast episode from this event here), and our viewers submitted a range of questions in the chat that will help demystify some of the frequently asked questions about Blockchain. Here is a Q&A breakdown of the most common questions:
A: Blockchain cannot prevent someone from entering incorrect information. One way to minimize careless manual data entry error is to pair up the use of blockchain with Internet of Things (IoT) to automate the data entry process. Click here to see some examples.
Possible SME business integration: Not all industries will experience blockchain equally. The early applications are in the financial services sector. Another early adopter is the supply chain industry where traceability is needed. Please take a look at the main writing for examples (e.g. Walmart, Starbucks, De Beers, and BYD).
Q: What are your thoughts on responsible governance/policy in a deregulated setting such as blockchain when it comes to issues like asset washing (e.g. NFT washing)? Is there a body that currently does/will in the future regulate and set the standards of how blockchain is used?
A: Government regulation always lags technology adoption. The level of regulation must be in the sweet spot: too many regulations would kill an emerging technology; too loose, then people will take advantage of that (e.g. the recent FTX collapse problem). Currently, governments are still listening to leading companies about how to best regulate blockchain. Cryptocurrency is harder than most other emerging technologies to regulate because of its decentralized nature. Lastly, we expect there will be a set of new governance bodies to set the blockchain standard.
Blockchain is not limited by the number of servers. Rather, just like any other computer network, it is limited by capacity and efficiency. For example, for a busy blockchain network, more computation powers (e.g., faster chips) are required to make sure that the network is running smoothly.
A: Knowing the technology (what it can and cannot do) would be an important first step. In terms of personal investment opportunity, beginners can start with well-known cryptocurrencies such as Bitcoinor Ethereum. Other investment possibilities are NFT arts, digital collectibles, and digital land.
A: Blockchain generates new banking needs; some examples are decentralized finance (DeFi), and currency in a digital format, such as Central Bank Digital Currency or cryptocurrency like Bitcoin. Either a new type of bank will emerge to address these needs, or the existing banks will expand their services to cover these needs.
This article is authored by Dr. Hubert Pun, Associate Professor of Management Science at the Ivey Business School. His research interests include co-opetition, counterfeiting product, and how blockchain can be used as an enterprise solution, and he has received the Western Faculty Scholar Award for his research contribution to blockchain business application.
It is clear that the crypto market is not a price inflation hedge as many had expected, or a significant source of diversification given the correlation with the broader equity market. All this has intensified the need for oversight and a clear regulatory framework to govern crypto assets.
Nonetheless, blockchain technology does not directly depend on the pricing of current tokens. Therefore we expect to see continued investment into blockchain infrastructure for enterprise applications, independent of the volatility of crypto assets. In fact, the current pullback in crypto assets will lead to further consolidation of firms and tokens and could provide a unique opportunity to attract crypto-native talent to blockchain projects.
All that said, it is now also clear that institutional players, given their access to sophisticated tools for risk management and trading, are better suited to dealing with digital assets relative to retail investors. We expect that clients of traditional financial institutions will continue to push them to support digital assets.
A survey we conducted in spring 2022 suggests that three-quarters of financial services executives included said they expect their firms to increase their investments in this area; they are most keen on digital assets as an exchange of value.1
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