I was recently talking with a friend who spent the past decade in an operations role at a large enterprise in the telecommunication sector. He has a matter-of-fact personality that likes to cut through the smoke and mirrors to find the fire.
I explained to him my role of having to filter through the dozens of entities that my market research team at R3 speaks with each month. And the formal process that our small team uses to look and find organizations that would be a good fit for R3’s Lab project pipeline.
For instance, because we typically act as the first part of the funnel for our organization, we end up listening to a great deal of startup pitches. And we are continually bombarded by endless “blockchain” and DLT noise. The first year alone we looked at and spoke to more than 300 entities, a number that has now reached about 400.
This is not to say that there are only 400 companies/vendors/organizations/projects billing themselves as “blockchain” related entities… unfortunately that nebulous term has ballooned to encompass everything from cryptocurrencies to big data to IoT and now probably numbers in the thousands.
If you’re working in capital markets, how to tell the pretenders from the real deal?
Should you seek advice from people who never interface with enterprises or institutions and get all their wisdom from social media? Or listen to columnists whose only interaction with banks is the ATM or a cryptocurrency meetup? Or to media outlets that do not disclose their (coin) holdings? Before answering these, let’s look at a new phrase below.
Thirteen months ago I gave a short presentation talking about the “blockchain” hype cycle.
The month before that – in December 2015 – I mentioned how much of the enthusiasm surrounding “blockchains” seemed a bit similar to the exuberance around “gluten free” food: how most people at fintech conferences talking about “blockchains” really couldn’t explain why blockchains were great in much the same way that many people asking for “gluten-free” food couldn’t tell you why gluten is or is not good for you.
I explained this to my friend and he said that the euphoria surrounding blockchains – and its vertical rise on the Gartner hype cycle – is similar to what he observed and experienced in “the cloud” space earlier this decade. And more specifically, to the phenomenon called “cloudwashing”:
Cloud washing (also spelled cloudwashing) is the purposeful and sometimes deceptive attempt by a vendor to rebrand an old product or service by associating the buzzword “cloud” with it. (Source)
So with that, I’d like to coin a new phrase: “chainwashing.”
I have personally seen dozens of decks from vendors along the entire spectrum of sizes during the current hype cycle. And watched the evolution of “blockchain creep” — how over time the word “blockchain” would appear more frequently not just on each slide, but in scope and vertical.
For instance, there are couple dozen different startups that claim to have somehow built an enterprise-grade blockchain system without having to go through the arduous process of gathering the functional and non-functional requirements from the enterprises they intended to integrate with. Magic!
While startup founders should shoulder the blame for these marketing gimmicks – as should the reporters that often own but do not disclose their (coin) holdings – investors are also to blame for not just talking their book, but also obfuscating their portfolio companies by pressuring them to rebrand retail-focused cryptocurrency products as bonafide “enterprise blockchain” platforms. They are not the same thing.
So what are some evaluation criteria to help identity the signal from the noise?
If your job is to help filter vendors for financial institutions, governments, investment funds, or other large enterprises, then some of these questions may be helpful in determining whether or not your firm should engage with the vendor:
- Why is the vendor using a blockchain?
- What is the vendor’s definition of a blockchain?
- Who has a problem that needs a blockchain in order to solve it: the vendor or the vendor’s customer?
- What is it about a blockchain that solves a problem that couldn’t be solved with existing technoloogy?
- If a blockchain-related infrastructure provides a solution to for the vendor, can it use any other existing technology to solve its needs?
- Do the founders and management team have experience managing, building, and/or deploying enterprise-grade systems or critical infrastructure?
- Does the vendor as a whole have the appropriate contacts and connections with institutions and regulators?
- Does the vendor have enough run way to build through a long sales cycle?
By asking these types of questions our team has helped filter the 400 or so companies/projects into a much more manageable dozen.
We think the number of companies with legs will continue to increase over time but chainwashing will continue to be a noise pollution problem for the next few years in the enterprise world even after production systems have been integrated into institutions.
As a consequence, it is probably safe to assume vendors are trying to pull a fast one on you, especially if it involves needing your company to acquire a cryptocurrency or “permissioning off” an existing cryptocurrency.
Remember: cryptocurrencies in the vein of Bitcoin were intentionally not designed to integrate with and fulfill the requirements of regulated institutions (like settlement finality) any more than a helicopter was designed to handle long distance cargo hauling. Chainwashing is the opposite of being fit-for-purpose and we see it with marketing gimmicks like “Layer 2,” the topic of the next post.
Update: see also Evolving Language: Decentralized Financial Market Infrastructure