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Cutting Through Blockchain Hype to Harvest Real Value

When it comes to miracle cures and silver bullets, we humans can be a susceptible lot. But if you are wary of falling in line behind the pied pipers of blockchain technology, you’re in good company. A growing contingent of researchers, business leaders, finance professionals, and tech experts are resisting the hype. At the same time, many who urge caution acknowledge the outsized potential of blockchain and are eager to determine how to exploit it for competitive and societal advantage.

Gary Gensler

“So much of life is about maintaining perspective,” says former Goldman Sachs partner, Wall Street regulator, and MIT Sloan senior lecturer Gary Gensler. “I think it’s essential to apply that mindset to blockchain technology. As often happens with potential breakthrough technologies, the rush to adopt it may be outpacing broad knowledge of its limitations.”

Assessing your use case
If blockchain technology isn’t applicable to all aspects of finance and entrepreneurship, how best to identify where the technology will create or add value for an enterprise—or for society as a whole? “A blockchain is an innovative database tool that facilitates novel approaches to money and the use of available computing power through a shared ledger system,” he says. “If your data lends itself to a ledger structure, then take a look at whether blockchain technology could enhance its utility or value.”

Gensler focuses on two key features that distinguish blockchains from traditional ledger systems. “The technology enables append-only logs, and it requires multi-party consensus about what the next block of data should be. Before you ever get to the currency side of things,” he says, “you can make an initial assessment of your use case with a handful of questions related to those two characteristics.”

The simple economics of blockchain
In Gensler’s mind, the assessment starts with a simple set of questions that tie back to the essential nature of the technology:

  • Which transactions and data need recording?
  • Which multiple stakeholders require write-and-read access to your ledger?
  • Which verification and networking costs can you reduce by using blockchain technology?

In relation to this last question, Gensler cites the work of MIT Sloan Associate Professor Christian Catalini and University of Toronto Professor Joshua Gans. The two researchers recently updated a working paper for the National Bureau of Economic Research (NBER) about the economics of blockchain technology.

In “Some Simple Economics of the Blockchain,” Catalini and Gans explain that the cost of verification relates to the ability to cheaply verify the attributes of a transaction. “If we can reduce the amount of infrastructure needed to ensure a consensus of facts, we can conceivably lower the threshold for creation and participation in such networks—monetary or otherwise,” Gensler says.

The second cost consideration highlighted in the NBER paper is networking. Catalini and Gans note that “a blockchain allows a decentralized network of economic agents to agree, at regular intervals, about the true state of shared data. This shared data can support multiple types of online transactions and corresponding payments, exchanges of IP, information, or other types of digital assets.” In digital marketplaces, benefits could flow from increased competition, reduced privacy risks and barriers to entry, and the diminished market power of a platform operator resulting from the joint investment in shared infrastructure by network participants.

The future is a hybrid
Given the buzz around blockchain technology and its potential to decentralize economic activities, many organizations fear that other companies will figure out the technology first and gain a competitive advantage. Gensler urges all organizations to proceed with caution. “I don’t see a massive wave of decentralization sweeping across the global economy any time soon. Instead, I think you’ll see nodes of decentralization where entrepreneurs are able to solve collective action challenges—i.e., how to incentivize network participants with tokens or other means—and deliver a broad public benefit. I also foresee nodes of existing centralization that continue to provide broad public benefits. Finally,” Gensler says, “I think we’ll see a number of hybrids develop, such as the Australian Stock Exchange, that allow a limited number of participants into the network and achieve verification efficiency gains using blockchain technology.”

 

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