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Blockchain: why does some innovation succeed while others fail?


Why do some innovations succeed while others fail? How can we predict which will succeed and when? These aren’t easy questions to answer but there are some principles that help us understand what success is and isn’t.

Let’s begin at the point where an innovation has been developed, has found some early adopters and has made its first tentative steps towards commercialization. To move beyond this initial phase, an innovation must be “good enough” to meet the needs of a particular market.

Numerous examples demonstrate how innovations have stalled in developed economies, only to thrive in the developing world — perhaps most famously in the case of mobile money. M-Pesa, first launched in Kenya in 2007, is one of the earliest and best-known mobile money wallets. Starting first as a means to make payments using Nokia-type handsets, M-Pesa has inspired multiple similar operations throughout the developing world, particularly among lower-income users where bank account penetration is low.

Leapfrogging through history

Before M-Pesa, mobile phones themselves created at least double the additional productivity in developing countries as in advanced economies. To understand why, consider the system that mobiles replaced in the US compared with India. Before mobiles, Americans would fumble for change at a pay phone or wait to go back home. In rural India, someone without access to a fixed-line phone might have to travel for hours. Mobile phones are the classic example of “technology leapfrogging,” where economies can skip intermediate technology and move straight to cutting edge tech.

Of course, in the same way that it would be misleading to generalize about advanced economies, developing countries are far from homogeneous. The World Bank Enterprise Surveys show that 11% of firms in Italy experience bribery requests, a great deal more than in many developing countries, such as Turkey, Chile or Georgia. Overall, though, about a quarter of firms operating in emerging and frontier markets report experiencing bribery requests, compared to less than 1% in developed countries.

Enter Blockchain

Where existing institutions of trust are weak, it is easier for blockchain-based systems to be “good enough” — to offer an attractive alternative to existing approaches. It seems rational to expect such innovation to have the biggest impact in developing countries. Innovations tend to be deployed faster and with a more fundamental impact in places where there is a less entrenched way of doing things.

None of this means that blockchain is destined to transform developing countries. Like mobile money, in its purest form blockchain is fundamentally about creating networks over which transactions can be executed between parties unknown to one another. Blockchain’s particular innovation lies in making the parties to transactions truly sovereign: many public blockchain-based systems do not require any third party to provide services or permission at any point.

To build such a system the problem that needed to be solved was “trust.” The pseudonymous Satoshi Nakamoto published a paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System in October 2008 that presented a novel combination of technologies to address this issue. Trust between total strangers was to be achieved by combining elements of computer science, cryptography, game theory and economics. It created a paradigm within which participants were economically motivated towards good or honest behaviour while bad actors were monitored and neutralized.

More than a decade on from the Bitcoin whitepaper, the blockchain ecosystem has developed at pace. So far, few of these developments made the world a meaningfully better place. The crypto community itself has tribalized around different technologies and philosophical approaches to blockchain. Its silos and fiefdoms run counter to the decentralized idyll envisioned over a decade ago.

We have no desire to add to the hype nor advocate a single approach. We apply a broad definition of what constitutes “a blockchain.” Our usage encompasses all of what many people would correctly refer to as distributed ledger technology or “DLT,” being any networked system that has distributed record keeping and allows all users within the system to verify data. In this sense, a blockchain is essentially just a shared database. This extends the scope of discussion to systems and technologies where information is open and searchable in a shared ledger, even if they don’t have some of the elements needed to meet purist definitions of what constitutes a blockchain.

What is clear is that for developing economies, and especially the smaller frontier markets, the traditional institutions of trust that might be relied upon in more advanced economies are frequently compromised by inaccessibility, under-funding, opacity and corruption —characteristics that undermine their role as arbiter of truth. Against this backdrop, the new paradigm of transparency made possible by blockchain provides an opportunity for systems to merge that rethink and redefine trust. In this context, for much of the developing world, the bar is lower for what constitutes “good enough.”

Is this new paradigm already in existence? Can we see pockets of how these emerging technologies are providing “good enough” alternatives to existing systems? The answer is an emphatic “yes.”

Blockchain has helped bring the first banking services to rural communities in the Philippines, spurred intra-African trade by obviating the need for currency transactions to go via the US dollar, and created transparency on invoices to help Latin American farmers and small businesses obtain credit.

Other applications remain untested, niche or heroically ambitious — such as using evidence stored on the blockchain to prosecute presidents for war crimes. Still, these applications allow us to frame an analysis of the likelihood and speed of innovation and, from there, the potential impact of blockchain in the developing world.

Blockchain is a catalyst for the next epoch of technology leapfrogging. If harnessed correctly, regions so far left behind by global economic development can leverage these emergent systems to boost productivity, economic activity and overall quality of life.

The implications of this are profound. Yet, a positive outcome is by no means certain. Blockchain based record keeping carries risks of entrenching the problems of emerging markets rather than resolving them. With great power comes great responsibility.

This is an edited extract from Chain Reaction: How Blockchain Will Transform the Developing World by Paul Domjan, Gavin Serkin, Brandon Thomas and John Toshack (Palgrave MacMillan)

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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