The blockchain hype cycle: A reality check for the enterprise

Much hype surrounds blockchain, the distributed database technology that is used by bitcoin and similar cryptocurrencies to record transactions. At the NIST Use of Blockchain for Healthcare and Research Workshop, one speaker showed several slides illustrating  some of the more outlandish claims that had been made about blockchain.

My favorite came from a magazine aimed at first responders, which claimed that blockchain could one day provide unlimited communications bandwidth to firefighters. And the claim that blockchain will fundamentally revolutionize the economy by allowing all sorts of productivity gains is almost certainly also false.

Blockchain will not dramatically increase productivity because information technology overall does not increase productivity. Here's why. 

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The productivity paradox

Economist and 1987 Nobel laureate Robert Solow summarized this paradox handily, noting, “You can see the computer age everywhere but in the productivity statistics." So, unless blockchain ends up being more important than innovations such as computers themselves, it will almost certainly not live up to the hype.

Even without looking at tons of economic data, it isn't hard to understand why information technology does not seem to increase productivity. Consider what can happen when a large, very efficient big-box store opens in a small town that is currently served by several smaller, less efficient stores.

In the long run, the larger, more efficient store may drive its smaller competitors out of business, but until that happens, both the more efficient operation and the less efficient operations will operate in parallel. That is very inefficient. It is even less efficient than things were before the large store arrived because of the unnecessary duplication of effort. But until the smaller stores close their doors, the small town will be unable to fully realize the gains from the more efficient operation.

But in the world of IT, the very inefficient situation is exactly what is happening all the time. Newer technologies are continually introduced that eventually replace older alternatives, but before the additional efficiency from the new technology can be realized, an even newer alternative comes along.

When this happens, we never reach the more efficient state where everyone has the best technology that is available and is able to use it in many productive ways. Instead, we are always in the least efficient state possible—the one that is analogous to having the big-box store and the smaller stores open at the same time. And because there seems to be no end in sight for innovative information technologies, the chances of breaking out of this cycle of inefficiency seem to be fairly low.

Just the fax, ma’am

Worse, it is possible that, as technology improves, additional nonproductive work is allowed by the newer technology. As an example of this, consider what happened when I bought my first house. In the last few minutes before closing, real estate agents were furiously busy faxing documents back and forth. The fax machine was a relatively new technology, and I asked one of the agents what they had done before it existed.

“Oh,” she said, “we didn’t need these documents back then.”

In other words, the availability of the fax machine created a need for more documents to be exchanged, many of which were deemed not important enough to worry about just a few years earlier. And the earlier lack of these seemingly vital documents was not reflected in higher default rates on mortgages or in an increased number of houses sold.

In this situation, it seems hard to believe that fax machines had made the process any more efficient. It is easier to believe that the total work just expanded to fill the same amount of time, and because this led to no more business being transacted, there was no real value added to the process by the fax machines.

What about the long run?

This doesn't mean that blockchain won't have some interesting long-term effects, possibly ones that are totally unrelated to its use in cryptocurrencies. For an example of such effects, consider the long-term effects of railroads.

Railroad mania dominated the British economy in the early 19th century. Between 1826 and 1836, businesses invested an amount roughly equal to the British GDP of that time in building new railroads. To fund this construction, it was necessary to connect the people who had money to lend with the people who wanted to borrow it. We take for granted today that making this connection is one of the fundamental functions that banks perform, but back then it was a new idea. So to fund the construction of railroads, the British essentially invented modern finance.

When other countries wanted to make similar investments in their railroads, the British banks were ready to help them. This led to London becoming the world’s most important financial center, a role that it held essentially unchallenged until World War I devastated the economy of Europe.

Railroads may have relinquished their position as one of the most important modes of transportation, but their secondary effects are still visible every time we get paid or take out a loan to buy a car. It is quite easy to believe that their effect on the financial system was much more important than their effect on the transportation system. Trains are now just another mode of transportation; modern finance is essential to the operation of today’s economy.

Is it possible that blockchain will have similar dramatic long-term effects on the world’s economy? This seems unlikely, but it is definitely too soon to tell. Amara’s law, an observation that is sometimes attributed to American researcher Roy Amara, tells us that we tend to overestimate the short-term effects of technology but underestimate its long-term effects. This, however, only applies to technologies that are useful enough to survive. Most do not last long enough for Amara’s law to apply to them.

IT is predictably unpredictable

Whether or not blockchain will prove fit enough to do this is anyone’s guess. The witticism that it is difficult to make predictions, particularly about the future, has been variously attributed to Mark Twain, Yogi Berra, and Niels Bohr, but it seems to lack a critical element. A better version is that it is difficult to make accurate predictions about the future, and this applies as well to blockchain as it does to any other technology. Anyone who tells you otherwise is selling you something.