The Law of Simplicity: McKinsey's Three Advices for Blockchain Innovators

Author: Boston McKinsey partner Matt Higginson, a partner at McKinsey San Francisco Marie-Claude Nadeau, senior partner at McKinsey Silicon Valley Kausik Rajgopal


In recent years, blockchain has become part of the commercial technology revolution, and these innovations have begun to reshape business processes. The blockchain is seen as a potential technology that can change the current rules of the game, but at the same time, this technology is also questioned. It is important to note that the current input-output ratio of blockchain R&D is seriously out of balance. Despite the industry's multi-billion dollar investment and the public's extreme attention, the actual scalability of the blockchain is still very weak.

This article analyzes the reasons for the blockchain's bottleneck and points out that if you want to truly become a revolutionary technology, the key is that the blockchain must be the simplest of the available solutions.

The industry is still facing an "innovation dilemma" during the development period.

This is a new, unstable, expensive and complex technology that is currently lacking in regulation and is not fully trusted by the public. From the perspective of economic theory, the development path of the blockchain twists and turns is not entirely unexpected.

Classic life cycle theory suggests that the development of any industry or product can be divided into four phases: development, growth, maturity, and recession. The first phase is when the industry begins or when a particular product enters the market. This phase is characterized by the fact that industry or product development often exceeds proven requirements, technology has not yet been fully tested, sales performance is often low, and return on investment is negative. The second stage is the beginning of demand, market expansion, industry or product "take off."

In many applications, the blockchain can be said to remain in the first phase of the life cycle. Most of the proof of concept (POCs) are at or about to end the pioneering model, and many projects fail to enter the C round of financing.

One reason for the lack of progress in blockchain technology is the emergence of alternative technologies, which are no longer the only good solutions.

For example, in the payment business, distributed ledgers replace the current highly intermediated payment systems. However, blockchain is not the only solution. A large number of financial technologies are breaking the original value chain. Last year, US investment in financial technology reached nearly $12 billion, of which 60% went to the area of ​​payments and lending. At the same time, SWIFT's Global Payment Innovation Service (gpi) plans to address initial pain points by increasing transaction speed and transparency, in partnership with banks. Blockchain participants in the payments arena, such as Ripple, are increasingly working with non-banking payment providers, which may be better suited to blockchain technology and willing to grow faster through integration.

Another reason is that it is facing a classic innovator's dilemma: if pilot companies invest in disruptive technology, and customers may be more eager for new services, the company's existing revenue may be affected.

Given the alternative payment solutions and the suppression of new technology investments by existing companies, the question arises from the ability of blockchain technology to provide payment solutions to the need to use blockchain technology. Occam's Razor believes that the simplest solution is often the best. From this point of view, the blockchain payment use case may be the wrong answer.

Can't enter the growth period but has three practical values

In a sense, the predicament of innovation has begun to affect the development of the industry. The development of the early blockchain was dominated by financial services companies. From 2012 to 2015, financial services companies attempted to allocate large amounts of resources to reorganize business processes. Banks and other institutions believe that scenarios such as trade finance, derivatives trading, and compliance (including installment payments) are particularly well suited for blockchains. Many companies have established innovation labs, hired blockchain experts, and invested in start-ups and joint ventures. A leading industry consortium has attracted more than 200 financial institutions to join its ecosystem to provide the next generation of blockchain technology for the financial industry.

The life cycle of blockchain in the financial services industry is 18 to 24 months earlier than other industries. Following the financial services industry, insurers have seen opportunities in the blockchain to improve contract and guarantee efficiency, and The potential of companies or organizations to share underwriting and fraudulent information. The public sector considers how to update its vast network with blockchains to create more transparent and accessible public records. The application of blockchain in other industries is also thriving.

By the end of 2016, the future of the blockchain looks bright, not only is the investment booming, but some structural challenges seem to be fading. At that time, technology blocked all breakthroughs, and regulators seemed to be more optimistic than before. However, from the perspective of the industry life cycle, the blockchain industry has also seen more complex dynamics. While the blockchain investment in the financial services industry is nearing the end of the first phase – in theory, this is the time when they should accelerate growth – they seem to be faltering.

In fact, McKinsey's collaboration with financial services industry leaders over the past two years has shown that executives who tend to use blockchain technology are beginning to raise suspicions. Because the financial services industry has invested billions of dollars, blockchain technology cannot be commercialized on a large scale, and there is no indication that the blockchain has saved costs or increased revenue. There are few benefits to many POCs, and even in some cases, blockchains bring more problems than answers.

Another issue is the market's need for complex networks. The logic of the blockchain is information sharing, which requires cooperation between companies, as well as standardized data and systems. Few companies are interested in leading technology development for a utility that benefits the entire industry. There are also many banks that have been distracted by the broader IT transformation and there is not much room to support the blockchain revolution.

At the end of 2018, some financial institutions began to re-adjust the blockchain strategy. They are more rigorous in reviewing POCs and adopting more targeted financing methods. Many people have narrowed their focus from dozens of application cases to one or two application cases, and emphasized issues such as oversight governance and compliance, data standards and network application.

The reality is that for many industries, the blockchain does not enter the second phase of the product life cycle. By the end of 2018, the practical value of the blockchain is mainly reflected in three aspects:

+ Specific scenario applications: Blockchains are particularly suitable for specific applications, such as the use of blockchains for assertion. In insurance, supply chain and capital markets, distributed ledgers address pain points including inefficiency, process opacity and fraud.

+ Modern value: The blockchain attracts strategic industries that are geared towards modernization. These industries view blockchain as a tool for standardization, process simplification and collaboration. Global shipping contracts, trade finance and payment applications have regained attention under the blockchain turmoil. However, in many cases, blockchain technology is only a small part of the solution, and this solution may not even involve a real distributed ledger.

+ Reputation value: Shows the company's ability to innovate to shareholders and competitors, but the company has little or no focus on creating business-scale applications. It can be said that blockchains that focus on customer loyalty, the Internet of Things, and voting fall into this category. In this context, the term “blockchain+” sounds hollow.

Still facing many problems in the future

The most valuable application scenario may not be financial

Due to the lack of convincing large-scale applications, and the blockchain seems to be stagnant during the industry life cycle, this is full of doubts about the future of the blockchain. Will the blockchain really revolutionize transaction processing while reducing costs and increasing efficiency? Are there any benefits of change in market infrastructure and data governance? Or is a secure distributed ledger a major choice when considering replacing infrastructure?

More and more people think that blockchain is not a good solution. Short-term spending pressures, cultural resistance in certain areas (blockchains may threaten employment), and concerns about disruptions in health income sources exacerbate this perception. In addition, the blockchain has challenges in governance – making decisions in a decentralized environment has never been easy, especially when accountability is also a matter of decentralization. In addition, there are some technical obstacles, such as the data storage capacity of the blockchain. Finally, there are security issues. For example, "51% attack" and quantum computer crack the threat of cryptocurrency transaction code.

However, not all are bad news. The smart contracts currently in use are likely to be upgraded or replaced in the next two or three years, and innovators are already looking for solutions. There have also been some good developments in the application case, especially outside the financial industry. Recently, blockchains have had many positive attempts in supply chain, identity management, and public record sharing.

An emerging view is that blockchains are most valuable when applied to democratize data access, support collaboration, and address specific pain points. McKinsey suspects that the blockchain will ultimately show the greatest value for specific application cases, not for financial services.

Three key principles for the next phase

There is no guarantee that any blockchain application will continue to evolve into the second phase of the industry life cycle. To enter the second phase of the blockchain application requires a solid theoretical foundation, a large amount of capital and more standardized operations. At present, the opportunity to solve the pain points on a large scale still exists. To achieve this goal, McKinsey recommends that the three key principles be considered as the minimum conditions for progress:

+ Must be problem-oriented: blockchains may not be an effective solution unless there are actual problems or pain points. In addition, this must be the easiest available solution. Companies must honestly assess their risk-reward preferences, education levels, and potential benefits. They should also assess the potential impact of any project and support business.

+ There must be a clear business case and target ROI: The organization must determine the rationale for an investment to reflect their market position and be supported by the board and staff. Companies should pragmatically consider their ability to shape ecosystems, set standards, and address regulatory barriers, all of which will inform their strategic direction. The value of the blockchain comes from its network effect, so most stakeholders must be consistent. There must be a governance agreement that includes participation, ownership, maintenance, compliance, and data standards. A financing agreement must be reached in advance to ensure sufficient funds for commercial operations.

+ There must be a roadmap: Once the scenario is selected, the company must assess the project's ability to deliver, including the availability of sufficient economic and technical support to own the project. Performance goals (volume and speed) must be set. At the same time, companies should establish the necessary organizational framework, including working groups and communication mechanisms, to fully support development, configuration, integration, production, and marketing (to drive large-scale adoption).

Conceptually, blockchain has the potential to revolutionize business processes in industries such as banking, insurance, shipping and healthcare. However, this technology has not yet been applied on a large scale, and it faces structural challenges, including the plight of innovators. Some industries have reduced their expectations for the application blockchain. As more explorations are carried out, McKinsey expects that more “realism” will be injected into the blockchain industry, and blockchain technology will be accepted by the market rationally.

Companies that are determined to move the blockchain forward must adjust their strategic arrangements, honestly assess the advantages of blockchain over traditional solutions, and adopt a more calm business approach. They should quickly abandon application business without added value. If they can do it all and be patient, the blockchain may still be the easiest solution.

(Source: Panews)

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