Back in January, McKinsey issued a piece entitled “Blockchain’s Occam Problem”, a treatise on how amongst other things, Blockchain continues to face adoption issues because it is not, and may never become, the simplest solution. Occam’s razor is a 13th century problem-solving heuristic that posits that the simpler solutions are more likely to be correct. McKinsey extrapolates that due to Blockchain’s complexity and current state as a clunk-factory, it may lack the momentum to break out of the Pioneering Technology stage into widespread adoption.

Let’s first set aside the irony of McKinsey, a consulting company known for complex, multi-million dollar implementations of things that are objectively not the simplest solution, advocating Occam’s razor type thinking. Occam’s razor is a heuristic, best described as a mental model for rapid decision making when time and information are constrained. In fact, I would argue that Occam’s razor type “tweet-length” thinking is responsible for a growing list of poorly thought out policies that could have benefited from solutions that, again objectively, were not the simplest. A certain steel tariff to combat steel industry job losses comes to mind. But this article is not to debate the minutiae or intent of Occam’s razor, but to redefine the value proposition and parameters of the McKinsey argument to argue that the investment of time, thought and money in blockchain are indeed worth it, but that the “worth” may not arrive in traditional or predictable terms.

Let’s first look at the opening paragraph where McKinsey quotes that “VC funding for blockchain startups has reached $1bn in 2017” and dissect it a little bit. I would argue that of the money deployed in blockchain startups in 2017, “real” VC funding from long-term, growth focused VCs formed a substantial minority with the remainder owing to short term speculators or “crypto hedge funds”. Neither of whom provide typical VC resources to early stage companies nor are prepared to stick out a true tech development cycle. I also would argue that a significant minority of the “startups” that “VC” money went to were not actually startups at all, but short term, low-governance vehicles specifically meant to attract non-VC “hot money”. All the two guys and their whitepapers take a bow!

I won’t argue that speculation has no benefits as I’m sure some non-market ideas that will change the world quietly got funded in the speculative bonanza of 2017, but $1bn of VC money in the utility token, quick turnaround, hype beast era of 2017 cannot be compared apples to apples to $1bn of actual VC money into actual tech startups in any other year. The McKinsey piece also quotes IBMs $200mm total spend on blockchain and that Google and others have been experimenting with it as well, but goes on to say that “large incumbents understand that investing in disruption…may lead to cannibalization of their own revenues”. This very accurate fact, along with the state of IBM’s current blockchain initiative, calls into question the “quality” of this capital as well. The amount of real, long term dollars that understand the technology, have unencumbered motivations and are in it for the long haul is fractions of the numbers commonly thrown around.

Let’s also put this $1bn+ number into perspective. There is no cohesive narrative to how “the internet” was created and this is not the place to debate it, but let’s say it took a disparate consortium of some quanta of government, university and large corporate researchers across far flung departments and geographies 30+ years to get from conceiving ARPANET to the commercial web boom that started in roughly 1995. Do you think they spent the inflation adjusted equivalent of $1bn in 1979 collectively on actual R&D? Likely multiples of that. The vast majority of that also happened behind closed doors so no hacks, no scams, no fraud, no crypto-kitties, no hype cycle, just decades of work by relatively small, siloed teams with limited incentives to work together.

We just celebrated the 10th anniversary of the first block being mined on Bitcoin. Open source since day 1. The fact that we’re at mid-90s internet level blockchain right now is astounding and a credit to the power of collaborative, messssssssyyyyyyy, open source development. And boy is it messy, but real, public decentralized blockchain is as paradigm changing as the internet and it won’t take 40 years to get there.

Let’s go back to the “blockchain is stuck in the Pioneering Stage of classic lifecycle” argument from McKinsey and redefine that as well. The internet didn’t follow “classic lifecycle” theory because it went deeper than that to re-organize the very ways that lifecycles, adoption, communication and commerce were defined. I would argue instead that there are slower, longer, infrastructure waves, upon which these “classic” lifecycle waves sit that set the parameters for how we think about adoption and lifecycle of a technology.

Therein lies the crux of this argument; if blockchain is looked on as a tool to enhance the bottom lines of traditional business and an overlay to the Web 2.0 internet complex that we have today, then yes, it is in a terrifyingly worrying state. If blockchain is a fundamental way to reorganize trust, capital and value then it is in its infancy and it’s accomplishments are extremely impressive with a huge upside. The limited amount of long-term quality capital that’s being invested in it is the thing that is terrifyingly worrying.

I think about it as valuing something as a discounted cash flow vs. valuing something as an option. In a DCF you have some growth to a defined potential end point and you calculate the cash flows from today to there and discount them back to today to get your value. If you’re extra fancy you have three or four end points and probability weight them to give some sense of uncertainty of future paths, but every end point is a known state. This seems to be the McKinsey view; blockchain could take 0% out of COGS, 5% out of COGS or 10% out of COGS, what is the value of the industry vs. what has been invested? PANIC! WRITE ARTICLE! In internet evolution terms, this would be like valuing the early internet based on whether people send 1 million e-mails per day, 5 million e-mails per day or 10 million e-mails per day. It’s a defined end point, but it only extrapolates what we know today.

In option valuation you have an infinite number of endpoints and the path towards the end follows an algorithm which gives you a huge set of probability weighted growth outcomes and then discounts those back to today. Option valuation, especially in volatile industries, leads to substantially higher valuations because of the potential for unknown scenarios. Sure the end states where COGS is reduced by 5% or people send 5 million emails a day are reflected in there, but so is an end state where we got the internet of today, which was completely incomprehensible at the time. The business models and value accruing methodologies that fully implemented blockchain can enable are incomprehensible today.

I’m obviously on one side of this argument and McKinsey for the most part is on the other. I have offered my reasons for being on that side in several other pieces and a16z has a great talk on why they are over here as well, however in the most prescient paragraph of the article McKinsey does a pretty good job Cing their respective As:

An emerging perspective is that the application of blockchain can be most valuable when it democratizes data access, enables collaboration, and solves specific pain points. Certainly, it brings benefits where it shifts ownership from corporations to consumers, sharing “proof” of supply-chain provenance more vertically, and enabling transparency and automation. Our suspicion is that it will be these species of uses cases, rather than those in financial services, that will eventually demonstrate the most value.

Why isn’t that the whole article? Do you want to take 5% off COGS or fundamentally shift ownership of a network that generates value from its consumers away from corporations towards those consumers (who I would call stakeholders)? As someone who spends all day meeting projects, investors and stakeholders of the industry, that “emerging perspective” dun emerged. Blockchain 1.0 solutions that are overly simplistic, single node, company specific or just aimed at rationalizing internal supply chains are dinosaurs. This isn’t a public vs. private / enterprise blockchain argument either, early public chain ideas like simple international remittances are realizing that the value proposition of simple blockchain by itself isn’t there. The full infrastructure of a logic-enabled blockchain plus surrounding payment, storage and collaboration ecosystem is what is necessary to actually change behaviours.

Blockchain doesn’t make sense as an overlay, it only makes sense as a fundamental reorientation of ownership and value. We as an industry need to shut up, roll up our sleeves, sell the lambos, leverage this open source beast and BUILD and we are! I’ll take the state of blockchain in 2019 over the hypemachine of 2017 ten times out of ten. We’ll take any large corporations and consulting shops with us, but I’m sorry, you can’t Occam your way to a new paradigm.

Alex McDougall

Bicameral CIO

About Bicameral Ventures

Bicameral Ventures is a Venture Capital fund focused on “Interdependent Investing” and building a portfolio of highly complementary projects working towards bringing new technology paradigms into reality. Bicameral’s themes include blockchain, interoperability, data and identity self-sovereignty, personalized AI and Web 3.0. Bicameral Ventures was co-founded by Kesem Frank, co-founder of Aion and Nuco Inc. and Alex McDougall, fintech and M&A investment banking veteran with Bank of Montreal Capital Markets.

www.BicameralVentures.com

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