Navigating Past Blockchain's 'Irrational Exuberance'

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Bitcoin is in a massive speculative bubble, with $95 billion in supposed value that belies the cold reality that all that crypto-green is actually not worth the paper it’s printed on – if there even were paper, which there isn’t. As Steve Forbes says, “you don’t even get a tulip for your speculation.”

And then there’s the Initial Coin Offering (ICO) market – or as I like to call it, ‘scammers paradise.’ What do you get when you combine the madness of crowds, global criminal enterprise, and a dearth of regulation? More illicit ‘wealth’ than even Pablo Escobar could bury in the mountains of Venezuela, that’s what.

And then there’s blockchain, the technology at the heart of all this craziness – or to be more precise, a family of distributed ledger technologies which may or may not technically be blockchain, depending on how you define it (I’ll use ‘blockchain’ in this article broadly to cover all such efforts).

Given I’m on the record as a blockchain skeptic, you might think I’m equally bearish on this technology. However, you’d be wrong. In spite of all the greater fool froth around Bitcoin and ICOs, blockchain actually has some real promise. I even recently wrote a positive article on a blockchain-based company.

Nevertheless, if you look at all the blockchain startups clamoring for attention, go to all the blockchain conferences springing up like weeds, and talk to any of the ‘blockchain experts’ stampeding through LinkedIn, you may be left with the distinct impression that blockchain is also little more than the product of the same irrational exuberance that will inevitably deflate as quickly as a popped balloon – and you, too, won’t even end up with a tulip for your troubles.

The question of the hour, therefore, for the three main blockchain constituencies – vendors, investors, and customers – is how to tell the viable blockchain efforts from the scammers and pretenders.

Even more critical: once you’ve chosen your favored blockchain horse to ride, how do you keep it from becoming the inevitable collateral damage when Bitcoin takes its nosedive and the Federales shut down ICOs?

Liz West

“You don’t even get a tulip for your speculation.” – Steve Forbes

What to Look for in a Blockchain-Based Business

The first thing to look for as you separate the wheat from the chaff is a clear business problem that a blockchain-based solution is uniquely qualified to solve.

Note that this criterion has two parts: first, the business problem itself must be clear, and furthermore, doesn’t have anything to do with blockchain.

How do you identify such a problem? It has to be painful enough that customers will be willing to pay to solve it, and furthermore, pay enough to more than cover the costs of delivering the solution at scale.

If the problem statement has blockchain in it, however, run as fast as you can in the other direction. For example, if a company’s problem statement is ‘how to use blockchain to ease global commerce’ or some such, then the business model won’t survive.

Bottom line: customers don’t want to use blockchain. They want to solve business problems.

The second part of this criterion is equally important: whatever problem the vendor has come up with, taking the blockchain-based approach to solving it should be the only way to solve it – or at the least, unquestionably the best approach. After all, blockchain is still mostly on the drawing board. If there’s a non-blockchain solution to the business problem that will do, then go with that.

Mind the Network Effect

My second word of warning: mind the network effect’s tipping point.

Because of the fundamental nature of distributed ledgers, there must be a sufficient number of participants willing to operate such ledgers in order for any business model to be viable.

Until a company gets to this tipping point, there needs to be some reason for people to participate, even though the solution itself doesn’t yet provide sufficient justification.

If you find a blockchain business that is already past this tipping point, then you can check this box – but you still have to be careful.

Remember, in an era of irrational exuberance, participants may be signing up for this blockchain effort or that, but once the hot air escapes, they’ll disappear as well – along with the viability of the business in question.

If the blockchain company hasn’t reached its tipping point – a category that includes virtually all blockchain-based businesses – then it needs to have a clear plan for getting there. There are two primary ways of passing this point: going viral and massive marketing spend.

Given that the latter is obviously quite expensive (and even if you throw millions of dollars at marketing, success is far from guaranteed), most blockchain companies have a plan that is some variation of going viral.

Be warned: going viral is never a good plan. It’s rare, unpredictable, and virtually impossible to do on purpose.

True, Bitcoin itself passed its tipping point by going viral, but that doesn’t mean your blockchain business will. On the contrary, rarely if ever does one initiative go viral the same way another has. Every virality scenario is essentially unique.

Savvy investors realize this principle, of course. That’s why any startup with a network effect-based business model needs so much cash out of the gate. Your best bet: pour millions (or tens of millions) into marketing, and hope you go viral along the way.

Don’t have the big bucks, or even worse, is the company depending on an ICO for the funds? Sorry Charlie. You have a recipe for failure on your hands.

On the flip side, don’t make the mistake of falling for the ‘it’s blockchain so this time it’s different’ line. No, it ain’t. Business is business.

The Decentralization Smell Test

Finally, you should always step back, take a deep breath, and ask yourself, ‘does this even make sense?’ Face it, given the level of irrational exuberance, many blockchain companies don’t even pass this most basic of smell tests.

Blockchain’s raisons d’être, after all, are decentralized transactions. So ask yourself: for the business in question, is decentralization a good thing in the first place?

Centralized transaction processing has been with us for decades, and for good reason: the combination of global regulation and mature business practice enable us to trust the banks and clearinghouses that handle such processing – at least, for the most part.

Furthermore, such institutions have largely figured out how to build scalability and resilience into their architectures. In fact, we now come to take for granted that, say, when we use our credit card at a store that the transaction will go through in a couple of seconds.

We are so confident in the centralized transaction processing, after all, that if a transaction doesn’t go through, we assume the problem is at the merchant or the card itself.

Not so with blockchain. The technology is unproven overall, and both scalability and resilience are little more than wish list items at this point.

In the final analysis, therefore, any viable blockchain business must have such a strong business model that customers will fall over themselves to conduct business in a decentralized manner, in spite of such obstacles.

Does your company pass the smell test?

Intellyx publishes the Agile Digital Transformation Roadmap poster, advises companies on their digital transformation initiatives, and helps vendors communicate their agility stories. As of the time of writing, none of the organizations mentioned in this article are Intellyx customers. Image credit: Liz West.

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