Going Beyond Pilots & POCs: Blockchain Catch Up (Part 2)

June 3, 2018

MONTHLY ANALYSIS

In part 1 of the blockchain mini-series, we discussed the pitfalls of a pilot-driven approach to blockchain – including the massive hype-cycle.

A recent Accenture project surveyed 800 large companies about which digital technologies are likely to have the greatest impact in the coming years. About 84% of respondents anticipate using blockchain within five years, and 47% are using it now.

Sometimes, the hype is not bad if it drives new technology adoption forward. Again, I worry that despite the flurry of activity today, too few real projects are being created to truly grow adoption (and impact) in the market.

Media hype sounds good on paper. What about real life?

Headed by ConsenSys Social Impact and MakerDAO (creator of Dai stablecoin), Project Bifrost uses blockchain technology to enable peer-to-peer value transfers, creating a more direct process for financial contributors to donate to those in need of assistance. Wow! Now that sounds cool and socially good.

With Project Bifrost, banks are taken out of the equation, thereby reducing fees and allowing more donation funds being passed on to aid groups. Donations can be transferred in less than three days and for less than 1% in transaction fees. Initial donations are converted to Dai. Once the staff member on the group receives Dai, they will use Dether to connect with a local or local business that will allow them to exchange the sent Dai for their local currency.

Pause here for a moment and read the last line again. The problem is with Dether. Dether allows organizations to accept Dai donations and provides the cash equivalent to specified aid groups. Really?

With Dether, people on the ground can get cash quickly and seamlessly, said company Co-founder Hamid Benyahia. Because Dether is a peer-to-peer system that requires only a mobile phone with internet access, aid workers can work with the local population instead of a centralized bank. This is critical for the two billion unbanked adults across the globe. Are you kidding me?

Imagine there is an earthquake in a remote place in Nepal. Are they expecting the local population there will be able to exchange cryptocurrencies for cash? In case of such calamities, people try to conserve their cash. And I doubt if people in those areas will know (or trust!) some cryptocurrency – forget about trading it with cash. And even if they find one person in a million by chance, will he take Dai to give cash?

Don’t get me wrong – I’m a believer in the blockchain-driven world, but the tough questions must be asked.

What about remittances?

My next favorite topic is the reality of the remittance market and blockchain. I’m not yet convinced about the claims that Stellar and Ripple actually solve a current problem.

**Press release language: **Ripple Reports Positive Results From xRapid Pilots – Financial institutions saw cost savings and increased speed when using XRP for on-demand liquidity…

**In reality: **This experiment is essentially how to improve messaging used in remittances. Can the tech help to send rich messages quickly from the US to Mexico vis-a-vis SWIFT? Actually, even though it is the world’s largest corridor for remittance, it is also the most inefficient one. Any enhancement in this corridor is a great improvement over traditional methods.

In this pilot, what Ripple is really doing is using market makers or exchanges for settlement. Now, these exchanges are not currently regulated – neither in the US nor in Mexico. This means the money is touched by an unregulated entity. That certainly will not go over well with the regulator.

Once these intermediaries are licensed (and governed) or recognized with regulators, then all this will make sense. Hence effectively at this moment, the only implementable piece is better messaging, while actual money transfer still has to go through banks! Surprised? Well, keep reading.

If you look closely, Ripple is actually trying to create a modern-day SWIFT replacement. Currently, all the exchange/market makers that Ripple is batting upon are non-regulated. Ripple is working to onboard banks as that would mean that money will be handled by banks. However, this would come with reporting and compliance responsibility, which is where things could slow down, become costly, and change drastically — good or bad.

The cost and the opportunity

There is a price to pay either way: for too many hype-driven, small-pilot programs that fail, or not doing them in the first place. Some CXOs believe that blockchain is not something they can use and they have declared it a dead end. However, the pundits differ?

Their advice is to keep investing in the POCs and pilots as ongoing trials – not one-time events.

That is the crux of the matter. Iterate every 6–10 months and not judge new technology like blockchain based on single tests. This dedication to R&D is how large tech companies are compounding their tech advantage. Remember the ImageNet trials for over a decade now for image recognition capabilities of humans versus machines? FinTech blockchain experiments will be no different.

Yet, there is light at the end of the tunnel.

Reimagining financial services from the ground up, like trade finance from part 1.

In defense of blockchain, we don’t need marginally better solutions; we need a paradigm shift. For that, you need a strong buy-in. Lots of POCs and pilots is one part of the journey to blockchain success. But practitioners believe that pilots and POCs typically have a narrow technology focus and fail to answer key commercial questions about the real-world governance and processes of full-scale applications.

Leading (and courageous) companies & innovators will make a true change once they have strong buy-in from boards/CEOs and go beyond pilots to production. When that is the case, they will also figure out how to handle the economics of business blockchains, such as how supply chain partners will be incentivized to participate in the new solution. I am waiting for that to happen and hoping that happens soon!

Compounding toward a new market

For example, consider Compound. Today, the majority of assets sit idle on crypto exchanges and in wallets, yielding no interest. Compound is launching its first money markets on the Ethereum blockchain so individuals, institutions, and Ethereum applications will earn interest on Ether, stablecoins, and utility tokens with complete liquidity (yet another reason to hold!)

Compound’s protocol is a series of open-source smart contracts that algorithmically adjust the interest rates for each asset in real time, as borrowing demand for the asset changes.

Those borrowers, mainly hedge funds, sophisticated speculators, and other Ethereum applications, use their portfolio as collateral to borrow from the protocol.

Salil Deshpande, Managing Director at Bain Capital Ventures, said that current lending solutions for crypto assets are not good enough: they are either centralized and have substantial counterparty risk, or require robust order books for each type of crypto asset, which generally do not exist.

This is what I call reimagining things completely for a blockchain world. Compound is the first project to receive venture funding from Coinbase and rightly so.

So if you, your company or clients are exploring (or working on) a POC in blockchain, perhaps it’s time to think bigger. Will this pilot lead to a fundamental shift in the company and the market? Or is it simply a part of the narrowly focused hype-cycle?

And if you are doing something interesting, please write to us and let us know! We’d love to hear about it.

Read and learn about topics you are interested in.

DON'T MISS OUT