McKinsey Says Blockchain Has an Occam Problem

Blockchain has yet to become the game-changer some expected, say McKinsey’s Matt Higginson, Marie-Claude Nadeau, and Kausik Rajgopal. A key to finding the value is to apply the technology only when it is the simplest solution available, as Occam’s Razor mandates.

Blockchain over recent years has been extolled as a revolution in business technology. In the nine years since its launch, companies, regulators, and financial technologists have spent countless hours exploring its potential. The resulting innovations have started to reshape business processes, particularly in accounting and transactions.

Amid intense experimentation, industries from financial services to healthcare and the arts have identified more than 100 blockchain use cases. These range from new land registries, to KYC applications and smart contracts that enable actions from product processing to share trading. The most impressive results have seen blockchains used to store information, cut out intermediaries, and enable greater coordination between companies, for example in relation to data standards.

One sign of blockchain’s perceived potential is the large investments being made. Venture-capital funding for blockchain startups reached $1 billion in 2017. IBM has invested more than $200 million in a blockchain-powered data-sharing solution for the Internet of Things, and Google has reportedly been working with blockchains since 2016. The financial industry spends around $1.7 billion annually on experimentation.

There is a clear sense that blockchain is a potential game-changer. However, there are also emerging doubts. A particular concern, given the amount of money and time spent, is that little of substance has been achieved. Of the many use cases, a large number are still at the idea stage, while others are in development but with no output. The bottom line is that despite billions of dollars of investment, and nearly as many headlines, evidence for a practical scalable use for blockchain is thin on the ground.

Infant technology

From an economic theory perspective, the stuttering blockchain development path is not entirely surprising. It is an infant technology that is relatively unstable, expensive, and complex. It is also unregulated and selectively distrusted. Classic lifecycle theory suggests the evolution of any industry or product can be divided into four stages: pioneering, growth, maturity, and decline (exhibit after link). Stage 1 is when the industry is getting started, or a particular product is brought to market. This is ahead of proven demand and often before the technology has been fully tested. Sales tend to be low and return on investment is negative. Stage 2 is when demand begins to accelerate, the market expands and the industry or product “takes off.”

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