Jan 10th 2023

The great decoupling.

If there is a silver lining in the experiences of the last few months, it may turn out to be one that turns the world of blockchain away from financial engineering and towards more compelling business applications that truly create value.

In the last year we have successfully dispensed with the myth that crypto banks the unbanked, that crypto is a good hedge against inflation and that financial engineering from Decentralized finance (DeFi) can somehow generate a better return on investment than any other form of asset. People have stopped asking me about my price predictions for digital assets and have gone back to asking about use cases. And that is progress.

The decoupling that is happening now is one where we separate the value of Ethereum as a global computing and business infrastructure, from the price of ether (ETH) and all these other digital assets. One of the guiding principles that we have built on here at EY is the idea that blockchains will do for business ecosystems what ERP did inside the enterprise. This new year is the perfect time to revisit that idea.

ERP stands for enterprise resource planning, and even if you don’t know what it is your life experience has been profoundly shaped by its existence. It is, very simply, the software that makes companies run. It’s the software that links an empty store shelf to a pull signal in the warehouse that brings more product. It’s how companies manage to offer consistent products, services and prices at scale all across our planet.

Enterprise transactions have been slow to take off because of the lack of privacy tools, which are essential. As that problem gets solved (see my prior discussion), we can start to think about how firms can interact with each other. The story of 2023 will, I hope, be about how useful applications start to emerge for connecting enterprises with each other, under privacy and on the public Ethereum ecosystem.

In this environment, we will have to build more slowly and carefully than we did with DeFi. Enterprise users are a more cautious bunch, and we’re already seeing skittish users worrying that the “taint” of crypto Ponzi schemes is hurting their ability to sell the vision inside the enterprise. This will slow things down but not stop them.

The likely order of development will be a risk-averse path. Companies are going to start with things like inventory management. Better visibility improves supply chain operations, and with privacy tools you can more easily manage your assets across an extended network. However, if you are matching, say, a physical inventory asset with a digital token, and that token is hacked or stolen, you haven’t really lost anything valuable. It’s not so much theft as it is data corruption. That’s a minor manageable problem, not a catastrophe you have to call the board about.

The next step after tracking assets is the addition of shared business logic. Companies are good at negotiating deals but often bad at remembering things like how much volume they have purchased before a discount or rebate kicks in. With smart contracts covering the sales process, that can become automatic.

It would be nice to take a break from the financialization of everything and focus on doing real stuff.

Eventually, of course, we’ll get back to where we started: money. Closing the loop in a business smart contract means paying for things purchased, and if all the other business logic and rules have already been applied it’s most efficient and useful to close the contract out by making payment with a stablecoin. Companies will also be able to do things like factor invoices and borrow against inventory value. But those financialization components are likely to be down the road and will be the last components of the system implemented by risk-averse enterprises, not the first.

Prepare yourself, though, as this revolution may be about as exciting as watching paint dry. Part of the explosive growth of crypto has been driven by consumers who can make decisions quickly. New technology can run through the consumer world in a decade. If there is a single rule above most others in the world of enterprise IT, it’s this: “If it ain’t broke, we’re not going to spend any money fixing it.” That means systems get replaced when they break or when a major new set of capabilities are needed or the return on the fix is large enough. We’re two decades into the cloud computing era, and while nearly all new systems are cloud-based most enterprise computing still isn’t in the cloud. Don’t expect faster with blockchain.

Finance has had a huge role in “paying the bills” in the last few years of crypto. Five years of triple-digit growth wouldn’t have been possible without the consumer embrace of cryptocurrency and non-fungible tokens (NFT), and I’m truly grateful for the growth and experience we have earned from that work. I think there will be more of it to come too: DeFi is far from over. But this year, 2023, I think it would be nice to take a break from the financialization of everything and focus on doing real stuff with real assets and real businesses.