Why enterprise blockchains fail? No economic incentives
For this week's podcast we will be discussing. Why Enterprise blockchain's fail and I'm very pleased to have Stephanie Herder Founding Economists and partner at Prison Group Stephanie. Thank you for joining us today. Could you please give our listeners? A quick introduction on yourself and on Prison Group. Hi. It's great to be here. I'm a founding economist of prison group. We'RE GROUP OF ECONOMISTS WHO advised watching projects on their economics and governance design as we work with everyone from native blockchain startups. That are VC. Funded all the way through to giant enterprise projects excellent excellent so as it is costing me here at Intra blocks. Could you please explain to our listeners? What is blockchain? And how does it work? That's a great question. Sell start at the beginning and work my way up so botching. Blockchain is a type of what we would call a distributed ledger as I think. We All know what a ledger is. We is like a database. We deal with them. On a daily basis Most of the ledgers we interact with are maintained by a single person or organization. So for example. your bank probably uses alleger to keep track of how much money is in your account and the bank is responsible for maintaining updating that ledger a distributed. Ledger is a shared ledger. Where multiple different stakeholders it could be. Different BANKS COULD BE DIFFERENT INSURANCE. Companies collectively control an update. The ledger to they have a process. Called the consensus process where in order to make a change in update to this shared database other needs to be a certain level of agreement among the different stakeholders so the fundamental level. It's way of having a a single share database where no single organization or entity controls it. A blockchain is a particular type of that because the transactions or updates are processed in blocks. And then when we talk about blockchain There's usually Implication of additional layers of technology that are on top of it so for example not every blockchain not every distributed ledger or blockchain protocol has mark contracts of many of them do and so when we talk about blockchain and how it works features like that or sometimes implicitly included great great so on the second of March Twenty Twenty. You published an article on Coin Desk entitled quote why Enterprise Blockchain's fail no economic incentives. Close quote in the article. You start off with quote enterprise. Blockchain is in the doldrums close. Could you explain to us why you feel that is the case? What is it in your opinion that has gone wrong? I think as a active participant working with a lot of different projects on their server. Familiar pattern that we see with enterprise blockchain. Typically these are consortium right so as we'll talk about one of the great benefits of having this distributed controls than enables data sharing consortium to form amid what we keep seeing. Are these pilots that you never hear from again right? So you'll have a consortium announced that they have a proof of concept or that they're going to do a pilot for specific use case and then a year. Later you come back and say oh. I wonder what happened to that pilot and never heard from again. Just see this pattern over and over again. A major thought leaders who were very big on The potential of enterprise BLOCKCHAIN MAY BE YEAR EIGHTEEN. Months AGO are starting to question. Why are these pilots working? Why don't we see more projects really taking off? So that's why I categorized. Enterprise blockchain is being in the doldrums interesting. Because I I totally agree with you. I mean we saw that especially knowing two thousand seventeen thousand nineteen a huge number of appears us there were launch and sometimes it feels that they were launched more for grabbing the press or because the the C. Suite rubbing being pressured by their investors by the practice to answer the question. What is your answer to blockchain? What are you doing blockchain? Fill as though they were just jumping into it to answer those questions without having an understanding of what Business Problem Day here to answer. Is that a fair assessment. In your opinion I think the the fundamental challenge is that blockchain has the ability to deliver a lot of economic value to consortium groups using it to solve problems. But you need to be really clear about what is driving the value creation of. Who's getting that value on before you can survive? Have a project successfully launching GRUB and I think a lot of a lot of projects. They weren't clear about what exactly blockchain was intended to do right. What exactly is it about. Botching compared to existing technologies that's needed for particular use case and then when it's implemented who is getting the benefit from this network How is the value being distributed? I think without a really clear understanding that it becomes very difficult to set up the necessary infrastructure for a successful project. Yeah not totally agree upon that point in in your article you you also mentioned that you know blockchain platforms our economic systems. What do you mean by that? So if you're going to the trouble of creating a blockchain based consortium you're doing it because you think it's GonNa create what we would call economic value right. It's GONNA save companies money. It's GonNa Save Time. You may be putting multiple different data sources into the same database. They're going to allow for synergies in new products and value creation. So there's a there's an economic rationale for almost every blockchain project and so you have to whenever you look at a consortium or permission list project you have to think about who are the different stakeholders what are their incentives to join and contribute to the system and to not be a chaos monster and how is the value that's created gonna be divided up and I think many projects you talk about this in the article on have taken a very technology. I approach so they focused really on. How do we implement the technical details of what we're doing without thinking about the economics of the system until it's almost too late in it's already been significant? Decisions have already been made exactly so incensed. You know something came quite clearly in in your article and you stating now is that you know. Perhaps one of the first step any consortium has to do is in identifying that value. So how can consortium create value straight from the get-go what what? What would you say is the process for doing that? So when we think of value creation in a blockchain based consortium or network we think of it in terms of three layers so the first layer is what is the value that the distributed ledger. The blockchain is is bringing itself We have a framework at prison group that we call the three CS and these are the three different levers of value creation that we see over and over again across different projects so the three CS are coordination commitment in control and the different features of a distributed ledger. Or blockchain create. He's levers of value more or less depending on the different use cases so for example. If you have a use case that's using smart contracts you know. One of the big economic frictions that we see in settings. All over is how difficult it can be to monitor enforce contracts right so just because you have a contract with another party that doesn't guarantee you know in the non blockchain world that doesn't necessarily guarantee that that other person or other entity is going to follow through on what they said they were going to do. So one of the promises of enabling smart contracts is that you know that whenever the conditions for the contractor met the contract automatically executes into this value beyond what we call a commitment right. You can increase the credibility if I promise to you that I'm going to send you ten tokens. Having a smart contract in place is more credible commitment than if I decide. I promise. I'll send them to next week. So we think about use cases knew what to what extent are coordination commitment control creating value. So that's sort of at the at the transaction level and then because these networks contain so many different entities there are two other layers on top of the DNC or the blockchain we think about on the next layer is is network offense so you're bringing together all of these different participants and they're gonNA have val increasing value from you. Know who else is participating. So they're different dynamics that that we're going to talk about and then finally on if you have networks running different types of applications also on the same chain with the same participants a you can have synergies. You have the same source of contribution of data being used in many different places. And so these are we think about any application we think about these different layers and how they build on each other and how they interact to deliver value to the construction.