What limits these more ambitious solutions is peripheral trust. Some 50 regulated global banks might have sufficient reason to trust one another’s honesty and competence. But for hundreds of brokers and thousands of issuing institutions, trust would be much, much harder to achieve. Hence the tradeoff between transaction costs and peripheral trust.

One can imagine a permissioned securities blockchain starting small but evolving to progressively larger scale and lower costs, as methods are developed to qualify the trustworthiness of additional participants. But there is a radical, if speculative, alternative: significant functions currently performed by “securities” could be performed by new, deconstructed smart contracts that are denominated in tokens native to some blockchain.

For those contracts, peripheral trust would be a lesser constraint, perhaps irrelevant. Such a blockchain would disrupt the club of trusting intermediaries, directly connecting the principals who create, buy, and sell the contracts. “Securities trades” would then be as fast, cheap, and secure as Bitcoin payments. And a big piece of the financial services industry would disappear.

Within most transaction networks, the larger a common blockchain, the lower the transaction costs but the less trusted the parties at its periphery. These and other scale economics are constrained by a more narrowly technical set of issues: the blockchain’s scalability.

Scale economics involve more than just balancing size and trust. There are four other mechanisms:

The larger the number of nodes and the greater the height of the blockchain, the more secure are the recorded transactions. This gives established blockchains (notably those for Bitcoin and Ethereum) an advantage over smaller and newer alternatives—not just in payments but in any application that can be built on these blockchains.

The larger the dollar volume of digital coins in circulation, the more liquid the currency and, probably, the more stable its exchange rate. This again favors established coins (such as bitcoin and ether) over startups. But more important, if a digital coin were to reach critical mass, it would become acceptable as a medium of exchange and a store of value in the economy at large, and a big piece of its associated transaction costs—the cost of trading into and then out of the coin—would disappear.

A single compelling killer app can pull through an entire ecosystem of associated innovations and create a network effect at both the top and bottom of the stack. However, one of the striking features of the blockchain landscape is that no killer app has yet emerged. Bitcoin, the currency, appears to be entering the flatter part of its S-curve (daily transaction volume has grown by only a third in the past 12 months), and The DAO, which many thought was the killer app for Ethereum, has collapsed.

The larger the blockchain and the more heterogeneous its participants, the more politically complex is the challenge of setting strategy. In permissioned chains, consortium management among members that otherwise compete with one another becomes critical. (Banks, in particular, have a checkered history of managing industry collaborations.) In permissionless chains, the challenge is to formulate and execute a technology roadmap in the face of the conflicting priorities of open-source coders, miners, and commercial developers. With digital currencies, conflicts escalate as the dollar value of the coins owned by some of these parties steadily grows. And open entry implies open exit: absent proprietary intellectual property, dissatisfied coders—convinced that they know better—can fork the code and steal the growth as well as the limelight.

Besides issues of business scale, there are huge challenges in technical scalability.

If Blockchains have a serious future, they must overcome current scalability roadblocks.

Currently, Bitcoin can handle 3 to 5 transactions per second and Ethereum 15 to 25. But the interbank Visa system handles 2,500. So if blockchains have a serious future, they must overcome current scalability roadblocks. Bitcoin’s capacity limit is dictated by the fixed rate at which blocks are created and the maximum block size. Faster block creation, it is feared, would destabilize validation, since a rogue chain could propagate faster than the consensus mechanism chasing it across the network could disown it. And larger block size would intensify economies of scale in mining, driving consolidation and making the validation system more vulnerable to collusion. (Already, 58% of the hashpower is held by four Chinese mining pools.12 Notes: 12 See the website Blockchain Info at https://blockchain.info/pools )

Moreover, the deliberate inefficiencies of Bitcoin and Ethereum will eventually impose practical limits. Nodes can create a block only by solving a very arduous and arbitrary computation called proof-of-work (for each block, 10,000 terahashes). This inefficiency secures the network by massively escalating the cost of rewriting the blockchain. But bitcoin mining already consumes as much electricity as a US city of 280,000, and by one estimate, as much as Denmark will consume by 2020.13 Notes: 13 “Bitcoin Could Consume as Much Electricity as Denmark by 2020," Motherboard, March 29, 2016. The cost and carbon dioxide burden will become economically and environmentally unsustainable as volumes grow by orders of magnitude.

The broad components of a scalability solution are widely recognized but have not as yet been implemented:

Proof-of-Stake

Under this protocol, a string of blocks is deemed valid only if the nodes creating it demonstrate sufficient ownership of the asset represented by the token to give them a compelling motive not to subvert its value. Proof-of-stake would radically reduce computing and transaction costs, enabling blockchains to facilitate much smaller transactions.

Channels

Channels are another layer in the stack. A subgroup of parties transacts directly but commits only a small fraction of transaction data to the main blockchain. Channels can thus proliferate without burdening the main blockchain and while still enjoying some of its security. There are many variants on this idea, such as the proposed Lightning Network for Bitcoin.

Sidechains

Closely related to channels, sidechains are blockchains in their own right. They create and destroy their internal token as a mirror of a transaction that immobilizes an equivalent on the main chain. This effectively allows users to move tokens from the main chain to sidechains and back again. The sidechain can operate on any principle whatsoever: lower security for minuscule transactions, fast block creation, smart contracts. It can even be a closed, permissioned chain.

Sharding

This is an approach that preserves a single global blockchain, but not all nodes validate all transactions. It sacrifices a measure of security for the benefits of scalability.

These developments are at the cutting edge of blockchain research and experimentation. The Bitcoin Core leadership is moving cautiously in these directions, as befits a blockchain advantaged for its security. The Ethereum developer community is moving much faster: the 2017 Release 2.0, code-named Serenity, will be explicitly built on all four design principles.

But startups with no legacy to protect are trying to beat established blockchains to the punch with the right combination of these principles. They may build on existing Bitcoin or Ethereum code and currency, or they could start afresh. The pieces are largely known, but the world is still waiting for the killer combination, the killer app.

There are five broad principles that will shape strategy for token and blockchain technologies.

1. BLOCKCHAIN STRATEGY IS MORE ABOUT COLLABORATING THAN COMPETING. It makes sense to expend resources on digital tokens and blockchains only when multiple entities are transacting at high cost and with imperfect trust. Therefore, the implementation opportunity presents itself to the entire transaction network, not to an individual participant. Global enterprise technology companies are investing to build alliances among their customers that could underpin transaction platforms in fragmented industries such as health care and international trade. Hundreds of Silicon Valley startups are focused on the same goal, or at least on advancing far enough to get themselves acquired. These will be decade-long projects. Participants in those fragmented industries need to decide whether the gains in growth and efficiency are worth the risk of being at least partially commoditized by a new, dominant transaction platform—and, if not, whether they can act in concert (as banks are attempting to do) in order to protect their autonomy.

2. ORGANIZATION AS MUCH AS TECHNOLOGY WILL DETERMINE THE RELATIVE ADVANTAGE OF BLOCKCHAINS. A central conflict over the next few years will be between permissioned blockchains curated by coalitions of intermediaries and the far more radical program to give end users direct access through open protocols. Oligopoly versus democracy, as some would have it. In many intermediary industries such as financial services, incumbents are rationally responding by adopting the technology among themselves. But it is a big and open question whether that will ultimately suffice. Open blockchains enjoy an advantage in scale: they have more blocks, more nodes, and more rigorous validation. By design, they can add participants less constrained by diminishing peripheral trust. But permissioned blockchains have an advantage in scalability relative to their target transaction network. They need fewer participants and can dispense with nonscalable features such as proof-of-work. So whether and when the status quo is disrupted—and by how much—depends less on the absolute pace of technical advance than on the relative pace at which private and public implementations advance. And that is largely a contest of political organization. Industry consortia need to work together when their members are otherwise competing. And open communities need to stick to a single script when individuals have diverse ideological commitments and are tempted to fork the codebase. The strategist needs to understand both, intimately, and be clear-headed about which camp holds the winning hand.

3. GOVERNMENT IS A WILD CARD. The current regulatory climate is surprisingly favorable. Bitcoin is legal in most jurisdictions, regulated as a commodity but not as a financial instrument. The primary focus of regulation is the top of the stack (exchanges, in particular) rather than the bottom (blockchains). Indeed, blockchains facilitate regulatory goals: they reduce counterparty risk, can comply with know-your-customer and anti-money-laundering rules, and can provide an efficient “backdoor” access to transactions. But of course the regulatory climate could change quite suddenly, especially in the face of security vulnerabilities. On top of that, governments themselves could drive transformative blockchain applications in identity, health care, and digital currency. They have the incentive and the critical mass. Many policymakers see this kind of technology as the catalyst for broader economic stimulus, job creation, and national competitive advantage. Some countries are more likely to think that way than others.

4. FINANCIAL SIGNALS ARE PROBLEMATIC. There are already murmurs in some boardrooms that the ROI on these technologies is not that impressive. Highfalutin rhetoric about embracing digital disruption notwithstanding, incumbents have little incentive to collaborate and invest to create a level playing field that merely lowers industry prices. Executives have to believe either that such innovation will open new markets or that it is a necessary response to a real disruptive threat. Otherwise, it is easy to imagine the majority quietly shelving the technology and the grand industry coalitions falling apart. A few “visionary” CEOs will ignore their bean counters. If the disrupters later succeed, those visionaries will become the heroes of business school case studies—and if not, the fools.

5. RADICAL UNCERTAINTY IS THE NORM. It only takes one really compelling and broad-based application, one killer app, to drive widespread adoption and pull through complementary infrastructure, products, and services. All we know is that it’s not bitcoin, the currency.

Conversely, some hacker could find an irreparable security flaw: not enough to deter enthusiasts, perhaps, but sufficient to spook the regulators. Or scalability could prove an insuperable problem.

Or a middle scenario: a few disparate applications might enjoy modest success without converging into a tidal wave comparable to the PC or the internet. Transformational ideas could die on the vine for lack of self-fulfilling momentum. Silicon Valley could have another bust or just move on to the next new thing.

The truth is that nobody knows.

As with any early-stage technology subject to network effects and strongly increasing returns, the business equilibrium is radically unstable. Strategy cannot be based on a “point estimate” of what the future will look like, whether derived from financial projections or a grand vision. Instead, strategy under conditions of uncertainty must focus on acuity, options, and experimentation.

1. ACUITY. Your organization needs to know its environment intimately: the technology, competitive moves, alliance politics, crazy startups, and shifts in public policy. Look out for discontinuities. Some open blockchain protocol could eclipse the closed efforts of an industry consortium; some government-sponsored initiative on the other side of the world could catalyze a killer app. Some breakthrough in encryption—or decryption—could transform security or scalability. Some development in another industry could wash over yours, the way whole industries became mere apps on the PC or the internet. Acuity cannot be delegated, because the correct framing of the threats and priorities is not yet apparent. Senior managers need to be part of a process of continuous learning.

2. OPTIONS. In strategy as in finance, the greater the uncertainty the greater the value of having options. Options are an investment whether they pan out or not; it is false economy to skimp or delay until the outcome is evident. So at the risk of redundancy, and even of supporting contradictory or competitive initiatives, invest broadly. Buy into a portfolio of alternative technologies. Join industry alliances and consortia: membership will give your organization early participation in whatever succeeds, the chance to learn, and an opportunity to shape the group’s priorities from the earliest stages.

3. EXPERIMENTATION. Apply “agile” principles to the development of small-scale token and blockchain applications. Experiments matter because they can point to a “strategy” and also because the very practice builds operational capability and confidence. MIT's David Clark famously articulated the mantra of the early internet community as “rough consensus and running code.14 Notes: 14 D.D. Clark, “A Cloudy Crystal Ball: Visions of the Future,” plenary presentation, 24th meeting of the Internet Engineering Task Force, Cambridge, MA, July 1992.

So stay close to the coders, the entrepreneurs, and the policymakers. Keep your options open. Experiment. These are the watchwords for thinking outside the blocks. And they are better guides to strategy than the airy enthusiasm of evangelists or the myopia of bean counters.

