Listen: Next in Tech | Episode 80: Blockchain in DeFi and Web3

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Eric Hanselman

Welcome to Next in Tech, an S&P Global Market Intelligence podcast, where the world of emerging tech lives. I'm your host, Eric Hanselman, chief analyst for the 451 Research arm of S&P Global Market Intelligence.

And today, we will be discussing blockchain and its various ramifications with research analyst, Alex Johnston. Alex, welcome to the podcast.

Alex Johnston

Thank you very much for having me, Eric.

Eric Hanselman

Well, thanks for being here. And we're continuing a conversation that's touched on bunch of different aspects of things that are founded in blockchain. We were talking about cryptocurrencies. Charles Janssen which has done talking about decentralized finance or DeFi.

One of the things I want to start out with is, I think a lot of times, a lot of these things all get lumped together and get identified as all one big thing. But of course, as we've been teasing out, there are a lot of different aspects. And blockchain is really much more foundational.

But I think it'd be useful to really start, before we get moving into some of the specifics and talk about some of the research, getting into really where blockchain is, what it's all about and what are the aspects of blockchain that our listeners should really be thinking about?

Alex Johnston

Sure. Thanks, Eric. So you've touched upon a couple of topics already. You mentioned sort of DeFi and cryptocurrency. But yes, I suppose the best way of saying it is building upon this blockchain layer.

And really in trying to explain the value of blockchain, perhaps less of how it works, I think the umbrella terminology used to group the sort of technologies that blockchain is a part of is concept of distributed ledger technology. It's probably the most helpful way of thinking of the value proposition.

You've effectively got a technology which really supports, I suppose you'd consider, a shared oversight of data between multiple parties. But I think where it kind of differentiates is a perception of being tamper-proof or secures a high degree of confidence in the data these multiple parties have access to.

And that sort of tamper-proof nature is really where a lot of these technology vendors really see themselves as differentiating. It's this concept as one individual within a large peer-to-peer distributed network.

It's very difficult to manipulate or modify historic data. And that's really, at its base level, I suppose, what blockchain is setting out to achieve.

Eric Hanselman

So really a situation where there are a lot of eyes on the records themselves, that the system is that degree of immutable and that large number of eyes gives you a certain level of security?

Alex Johnston

Yes, certainly. I think that's where a company see the value proposition. It's also this decentralized aspect, which -- I mean a way of seeing it can almost be a philosophy, and a lot of the organizations and evangelists involved in the space already see themselves a decentralizing force and a needed decentralizing force.

And I think that's something to keep in mind when we think about enterprise applications. And in some cases, blockchain evangelists have a very broad societal wide view of how this technology might be applied.

And I think, in some cases, that's caused a sort of imbalance, I suppose, or enterprise proprietary technology perhaps didn't see it addressing a lot of the initial hope that the technology had or a lot of the sort of narrative each evangelists have sort of pushed.

I think what's quite interesting is the market is now maturing. Some scalability has made it more applicable for businesses or improved scalability made it more applicable for businesses. I think as the technology has matured, we are seeing the conversation changing somewhat.

We're seeing great success in the pilots. The organizations are engaged, and we're seeing new use cases that enterprises are engaged. And we're seeing a lot more education -- or educated conversations surrounding a lot of this technology, which is quite exciting.

Eric Hanselman

If you think about any technological revolution, I guess, if we dare to call it that. I mean those in the vanguard are always really passionate.

They've got some fairly idealized views of where it's going to go. And then we start to integrate the technology in ways that are practical and usable for organizations more broadly.

Alex Johnston

Yes. I think something we're seeing -- and again, I think later, we'll probably cover this off when we talk about some of the data we found in our recent report. This concept of invisibility integrations are really fascinating one in the blockchain space.

Obviously, blockchain abstraction has been sort of a conversation point for a number of years now. There's an idea that actually, in part due to the lack of low-level programming skills associated with smart contract developments, things like Solidity or Rust and those sorts of programming languages.

It's really meant the enterprises wanting to engage with the blockchain having to do it at several levels of abstraction. And that, certainly, where a lot the development market is looking.

But a lot of the companies we're talking to now have integrated blockchain to such a level than the technologies that you'd be kind of unaware that had this distributed ledger underpinning in some cases. So things like data marketplaces, for example, where we're seeing a lot of that kind of activity taking place.

Eric Hanselman

As I keep saying, our listeners know that one of my favorite words about technology is abstraction. And we were talking about it around decentralized finance with Charles Jansen.

The fact that you could actually put the DeFi pieces of a transaction within the payments process so that, in fact, you didn't ever have to worry about any of the detailed aspects. And you're talking about the coding requirements for smart contracts.

The real value is when we start to get to those levels of abstraction that hide the complexities from those users who can really get value out of it. And that you mentioned the data of -- that really is a lot of the interesting things I found in the study results we've got.

So we've got a study that's just out about blockchain use. So what were the findings of the study? And what are the highlights?

Alex Johnston

So I think, obviously, straight off the bat, a lot of the focus, a lot of conversation around the reports surrounded the kind of adoption starts. Because what we found is, obviously, there's a lot of concern with the collapse of the cryptocurrency, some highs in late 2021, around adoption.

But actually, enterprise adoption looks quite bullish. Around 21% of enterprises currently making use of the technology. Although it is worth noting, obviously, there's quite a difference between different industries. So finance, unsurprisingly, the most mature.

But areas like manufacturing and health care, there's a lot of investment in that space. But on top of that 21% currently using the technology, around 19% are currently a proof of concept or pilot stage.

But what I think was quite interesting about the data is it's just a bit of a stratification. So that sort of combined 40% is a very similar proportion to the number who are unaware of any plans to use within the next 3 years.

You've kind of got the have's, I suppose, and a group you can almost call the will not's, which kind of, again, both those groups are sort of around 40%. There's very few organizations that sort of have it planned within the next 12 months or next 24 months.

Eric Hanselman

Interesting. I wonder whether or not that's something that -- because we see this so often with the technology that gets heavily hyped and there's a set of folks that are identifying that it's too buzzy, it's too far out there.

There aren't practical applications for it. It's just not for me that kind of approach. It's interesting to note that the study data show that they're really -- it's sort of this barbell effect of the have's and will not's, as you said.

Alex Johnston

Well, I think actually diving into that concept of determining specific use cases, this idea of companies not really knowing how to apply blockchain is no longer so much the problem as the actual operational challenges or the implementation challenges.

So around just under 30% of organizations were facing challenges around determining how to apply the technology. But actually, skills, for example, is a bigger barrier that enterprise were seeing concerns around privacy and security.

It was a barrier organization was seeing cost. Operating cost, obviously goes hand-in-hand with a lot of the ESG concerns as well around resource intensity and that sort of thing.

So it was fascinating that companies that weren't implementing the technology weren't necessarily doing it because they couldn't see the value in it, which would have been the case a couple of years ago.

A lot of the conversation now seems to be tied into, we're not in a position to make use of the technology. We don't have the skills. We don't have the infrastructure. And I think that's a really fascinating transition that the market seems to be taking.

Eric Hanselman

Oh, interesting. So there is that significant segment who would potentially head there, but yet are being held back by skills gaps, availability of the technology in their sphere. Interesting.

Alex Johnston

I think it's also worth viewing, a lot of the sort of enterprise-focused market is still quite immature. So even some of the perhaps less enterprise-focused for some of the blockchain networks are undergoing rapid development.

So -- but some of these networks have had issues of availability, for example. A lot of these issues have been related to scalability. So as many individuals know you might have tried to engage in Ethereum, for example, the cost of transacting those platforms are quite high.

So I think there's still a lot of barriers preventing companies getting involved just from the technology side and the matter of their own internal difficulties.

Eric Hanselman

Well, one of the things we were talking about with decentralized finance conversations is scaling there is, of course, a significant concern. And if the back-end blockchain can't support the volume of transactions that are required to really make it work, that winds up being a significant issue.

So are there aspects to the study that when we start looking at other pieces of the data that are helping to guide organizations in terms of what they should be thinking about? I guess some of this is helping to build the depth of skills benches those sorts of things. There are sort of directions there that the study data were showing?

Alex Johnston

Yes. So we've really touched upon abstraction. And I think I mentioned already this kind of focus on the application development side, a lot of the companies who are trying to build platforms support companies setting up networks, setting up decentralized applications.

Really building from what was initially just really hosting blockchain nodes to a far more sophisticated and holistic platform, where they think about how to sort of integrate on and off chain technologies, for example, how to integrate with sort of enterprise-grade solutions, how to allow developers to use the IDs of their choice, for example, rest APIs, those sorts of things.

So I think that's where -- maybe where the market is moving. I think rather than companies solving for the skills problem internally, although a lot of the vendors we've spoken to are putting a lot of focus on education, I think a lot of it might be sold for by blockchain almost becoming one potential architecture approach that organizations might be able to engage with through the tools they've already got available. So that's something that really stood out from the report.

Eric Hanselman

So getting to platform capabilities that help to abstract away a lot of those complexities as we were discussing.

Interesting to see the levels of integration and where that goes, but if you can start to build it into the enterprise systems that are looking to whatever that record recording process happens to be, interesting ways to be able to do that and to build communities around it.

Alex Johnston

Something else which really stood out was this concept of sort of multichain approach. So within blockchain networks, obviously, there's a huge number of different protocols and networks, some very famous ones, obviously, Bitcoin, Ethereum.

And when you think about programmable blockchains, like Ethereum, we also got like Solana, Cardano, Algorand. On the private permission side, you've got things like Hyperledger. And all these different protocols really balance your scalability, cost, decentralization, security, privacy.

that wide array of different aspects to these protocols in terms of what they can be used for. And something which really stood out from the report is organization are taking multichain approaches.

So they're very interested in what's going on in public blockchain ecosystems, for example, like Ethereum. They want to be selling to consumers that are already an audience or a premade audience within these blockchain networks, for example.

So that was a really fascinating finding. The organizations aren't restricting themselves to the Hyperledger fabric, these permission private blockchains. Actually, they're thinking about the whole gamma, I suppose. They're thinking about all the different technologies available within the space, I think, very broadly about their adoption.

Eric Hanselman

Wow. So this is -- but that's something where we see hybrid approaches in so many different aspects of tech. The various infrastructure elements. I mean we've seen it in the growth of infrastructure capabilities.

People starting to blend on and off-prem, being able to pull together what are the right resources for the right requirements. And it sounds like they're looking at doing the same kinds of things with blockchain to be able to take chains that meet particular requirements for different applications and blend them together. Fascinating.

Are those things -- they're platforms that will help them leverage that kind of capability? Or is that something that organizations are looking to sort of do a mix and match more along the lines of having capabilities available to them?

Alex Johnston

I think that's a direction of travel. So on the sort of Web3 native or start-up side, a lot of the platforms designed to support application development are going towards blockchain neutrality and that you can address the number different protocols using their technology.

That's less the case of the -- obviously, in the spaces of large hyperscalers. So IBM, for example, AWS, Oracle, those ecosystems or architectures are primarily built around sort of a single protocol or a limited number of protocols.

Whereas on the Web3 native side and not exclusively, there are companies like Telefonica, we spoke to recently, for example, who are looking at kind of blockchain neutrality. This idea that we should be supporting multiple protocols through our solution. It should be easy for developers to access these protocols.

Eric Hanselman

Interesting.

Alex Johnston

And that's really a useful way to think about it. Because when we talk about use cases for blockchain, obviously, there's things like payments, but there's also things like supply chain tracking.

We talked about direct sales offerings, loyalty and rewards programs, asset trading, data document sharing, actively integrating into a product. Those are very different series of needs. So to solve for that with just one blockchain network, you can sort of see why organizations are approaching this from a multi-chain perspective.

Eric Hanselman

Well, one of the aspects of chain that I wanted to touch on, you'd actually mentioned before, the ESG and energy aspects. It's one of those things that I think we hear anecdotally a lot, which is concerns about energy requirements?

But that's something that I think probably gets driven out of a lot of concerns about Bitcoin, and I think one of the things we've been talking about. Unfortunately, there's a lot in this area that gets hit with a broad brush of concerns about crypto generally.

I mean we saw it in decentralized finance. There were concerns that DeFi was in trouble because of crypto crashes. All these kinds of things, and I think that at least one of the things we hear, are concerns about energy consumption in blockchain broadly because of the energy that's used for Bitcoin mining?

Alex Johnston

Yes. I think Bitcoin is a really good example of the challenge. So a lot of the early cryptocurrencies are built around a consensus mechanism. And this consensus mechanism is effectively a way of validating the data we just stored on the blockchain securing the network, really.

And these consensus mechanisms are very energy-intensive or at least initially with cryptocurrency. It was known as proof of work. And some of Bitcoins are still linked to the sort of proof of work census mechanism. You've got Elon Musk's favorite, Dogecoin, for example, a famous and quite embarrassing meme. We've got obviously Bitcoin itself.

Eric Hanselman

Come on. It's a cute meme.

Alex Johnston

But there is a transition away from those very energy-intensive consensus mechanisms to significantly less energy-intensive ones. So a nice illustration of that, I think I mentioned already, Ethereum, which is the largest sort of decentralized application ecosystem.

And that's transitioning from the very energy-intensive proof of work consensus mechanism towards a less energy-intensive proof of stake. And a lot of the -- I've already thrown out sort of Solana and Algorand and those sorts of organizations are looking towards significantly reduced ESG impacts.

In fact, some of these Generation 3 or Ethereum-killer blockchains, as they advertise themselves, looking to sort of supplant Ethereum's position in public blockchain ecosystem, is really putting a lot of attention on the sort of ESG conversation.

How actually their consensus mechanisms, their underlying architecture is significantly less-energy intensive. In fact, some of these companies are advertising themselves as actually being sort of carbon-negative through offsetting, which is a notable trend.

Eric Hanselman

Oh, wow. Well, again, I could imagine, given the level of focus that was placed upon energy consumption, the ability to not only address it, but then go beyond addressing it and actually get to carbon negative would be -- again, one of those very top of mind things that's going to help to hopefully drive adoption and get rid of some of the primary concerns around the technology itself.

Well, what should organizations be considering around blockchain? They're looking for the year ahead. It sounds like the study results, at least, are showing that there's a strong constituency that's moving along with this. What should the broader market be thinking about?

And in terms of putting blockchain to work, talked about the have's and the will not's, are there will not's that should be considering that? Or is this something where use cases are maturing? What should they be thinking about?

Alex Johnston

I think the most sensible thing for organization to keep in mind is to really narrow the focus on what blockchain's value proposition is really. So viewing at its based the most fundamental level, this idea of multiparty visibility of data.

And I think that circumstances it would be particularly useful is when data is at risk of being manipulated or modified or circumstances in which is not clear who the owner of that data would be if those 8 or 9 organizations all engage initiative. Why should one company should be the single source of truth?

Also in circumstances in which there's a third-party need to verify or validate data, for example, and that's significantly increasing the sort of length of time it would take to run through a process. And that all areas where I think blockchain is particularly valuable.

So viewing at that base level is particularly important when thinking about where it would be valuable to apply this technology. I think something that we were talking about before this podcast recording, Eric, was the sort of the challenge of a kind of Wild West space in blockchain, the kind of poor regulation, for example.

Eric Hanselman

It's one of those things that I think comes up quite a bit. And it is one of those sort of broader concerns that thought that this is a technology that may be hard to master that, in fact, the risks may not be fully understood because it's relatively early on.

And again, that lack of regulatory impact that sort of bleeds over from the crypto world is one of those things that enhances people's concerns about risk.

Alex Johnston

Yes, certainly. I think what really stands out, just touching upon the consumer space, is often when blockchains conceived over evangelists talking about blockchain, there's a perception of how this sort of unchain economy ends up representing and interceding with the off-chain one.

The physical assets or access to physical assets could be provided by tokenized assets and those sorts of things. But really the challenge the blockchain faces is hyperfinancialized.

The point that if I was an organization, I'd be very reluctant to make a very valuable service available through sort of access to a token, for example, because that token can easily be sold on to another pseudonymous identity.

I think hopefully, as technology matures, it will move away from the sort of low-value speculative assets that held entirely for speculative users. And increasingly, the sort of on an off-chain integration improves.

The companies do start accepting cryptocurrency payments, for example, or the companies might even start to think about how virtualizing physical assets and placing one chain, for example, might be a useful way to store that data.

I actually think the cryptocurrency crash might be quite beneficial to the enterprise market, perhaps less so B2C applications or selling into those communities.

But in terms of maturing the technology, moving away from this kind of speculative asset appreciation effectively, which is still how the media represents it, indeed, how I think a lot of people engaging with the technology are using it already.

Eric Hanselman

Interesting. So in that shift, is that something where enterprises should be considering working with partners around it, direct engagement? I guess, what are first steps to sort of get toes in the water?

Alex Johnston

So what we've discovered is that a lot of blockchain initiatives are consulting-led. So organization found their first interaction in terms of building out the underlying infrastructure and architecture, understanding how it fits at the digital road maps through consulting activities.

Indeed, as a result of that, of an organization will leave at a sort of highly customized blockchain network, often private mission one where individuals are sort of picking -- handpicked entities to join them as part of this network.

Over time, we see that kind of shifting. So veterans tend to start to invest up stack, to start to explore how rather than relying on consultants to build out these networks for us, we can start to use our own application tooling. We can start to build our own decentralized applications or even purchase or gaining access to pre-existing blockchain networks.

And in some cases, organizations are starting to think -- actually, there's a lot of exciting innovation going on within the blockchain -- public blockchain ecosystem. Perhaps we can leverage that by looking at ecosystems enterprise haven't traditionally been associated with.

So throwing out some of those names already around Ethereum or Solana, for example. But to access those networks, organizations are often looking at partnerships with sort of scalability solutions in the case of Ethereum.

So companies like Polygon, for example, which allow organizations to interface with Ethereum without having to worry about things like the slow throughput or the cost of doing so.

Eric Hanselman

Again, useful abstractions that are making the technology more available and more practical. This has been fascinating, Alex. And especially after a lot of the top level abstractions we've been talking to really look at some of the foundations of where blockchain really is.

And some of the data, I will point our listeners to the voice of the enterprise data around the blockchain that's just recently out. And thank you very much for being on the podcast.

Alex Johnston

Great. Thank you very much, Eric.

Eric Hanselman

And that is it for this episode of Next in Tech. Thanks to our audience for staying with us. And thanks to our production team, including Caroline Wright, Caterina Iacoviello, Ethan Zimman and our intern, Michael Asaolu, and the marketing and events teams and our studio lead, Kyle Cangialosi.

I hope you'll join us for our next episode, where we're going to be digging into aspects of cloud operations, cloud pricing. Some of the pieces that are really some of the upside of where cloud is today with Melanie Posey, who's a returning guest for us.

I hope you'll join us then because there is always something Next in Tech.