Opinion by Paul Brody, founder and chief executive, Nightfall Networks
Do you remember Pets.com? It raised $110 million from Amazon and others to build a business where people ordered pet toys and dog food online.
The company crashed and burned, and everyone learned an important lesson: you can’t profitably ship a 50-pound bag of dog food to a customer’s door.
As online retail entrepreneur Ed Baum asked in a 2001 postmortem: “Did Pets.com’s business plan assume the invention of transporters to magically move bags of pet food without shipping costs?”
Please, whatever you do, don’t share this with the people at Chewy; they might not realize their business model doesn’t work. Chewy reported $12.6 billion in sales and $223 million in net income in its latest fiscal year.
The real lesson of Pets.com wasn’t that shipping dog food was a bad idea. It’s that the idea arrived before the logistics, customer habits and unit economics required to make it work.
As it was with chew toys and dog food, so it may be with enterprise blockchains.
Collectively, the crypto industry probably incinerated just as much money trying that between 2017 and 2023 as Pets.com. Maybe more. But the dozens of companies that went after enterprise blockchain were not delusional; they were just too early.
Why businesses need enterprise blockchains
It’s not hard to understand the appeal of enterprise blockchain solutions, at least superficially. Nearly all enterprise systems today tend to fail at the boundaries between companies. There are two failure modes: mode 1, the OG failure mode, where collaboration information is constantly out of sync.
In this world, enterprise IT systems are islands, communicating asynchronously with each other by digital text messages and emailed spreadsheets. It’s cheap and easy to set up, if you don’t mind always having slightly wrong information.
Related: Privacy is missing ingredient for business blockchain adoption: EY exec
Failure mode two is the costly, real-time proprietary integration. Powerful industry leaders politely request their key suppliers and partners to join their closed but always-on networks.
Chewy reported $223 million in net income in its latest fiscal year. Source: Chewy.
These are very costly, but they work well and leave everyone with a kind of business version of Stockholm syndrome, where you come to appreciate the thoroughness and efficiency of the digital choke-hold you are in.
Blockchains offered a better path forward: shared information and business logic across an open ecosystem. All the benefits of a proprietary system in terms of real-time visibility and efficiency, without the lock-in.
Sometime around 2017, this started to look like a very obvious good idea. Investment poured in, consortia launched, press releases were drafted and released, and then pretty much everything crashed and burned. TradeLens, We.Trade, Contour, B3i, ASX Chess, Everledger. All came and went in just a few years.
Though there is a lot of nuance to the details of each of these stories, they all largely have one thing in common: they had to do unnatural things to make up for the lack of privacy available natively in blockchains.
Companies need privacy, not transparency
No company wants their competition to see what they’re doing in detail. Mostly, this meant building a private/permissioned chain and then doing lots of non-blockchain-like things to it and in it to try to keep information private. The results were uniformly slow and expensive and failed to gain traction.
It’s hard to understate the bloodbath of companies and startups that tried and failed to make enterprise blockchain work. A quick web and history search turned up 18 different ones, some of them well-known.
Many had big-name backers, from major banks like Deutsche Bank and HSBC to technology companies like IBM. Pedigreed parents and big brands made no difference — privacy didn’t work and the results were dismal.
What few survivors of this are left have “de-chained” themselves — giving up the blockchain theater and reverting to a classic software-as-a-service (SaaS) model. Many companies that tried and tested these permissioned enterprise systems as users came away from their experience with a clear learning: we tried blockchain, it didn’t work.
That’s unfortunate because everything is different now.
Blockchains today have scalability, privacy and liquidity
Blockchains have scale. Ethereum in 2020 handled 1 million transactions a day and costs per transaction periodically spiked to $30-50 when demand was high. Today, most transactions get done under a penny and capacity is ramping toward billions of transactions a day. Nobody talks about the “trilemma” anymore. Ethereum is decentralized and it is scaled.
Related: Ethereum’s Glamsterdam upgrade launches on Sepolia testnet
Privacy is different now, too. While privacy is still not the default setting, a huge range of privacy tools and systems are now available, from privacy pools to zero-knowledge roll-ups and full privacy chains.
On top of that, Ethereum is building a range of tools that will add basic elements of privacy at multiple levels in the network. The result: it’s now possible to run business operations at scale with a high degree of privacy.
Finally, there’s the money. It’s all moving onchain. Regulators around the globe have blessed stablecoins and the result is a tsunami of liquidity, with transaction volume reaching almost $1.8 trillion in June.
If we combine the operational benefits of blockchains with the financial ones, we get something that enterprises have never really had before: a single ecosystem where you can not only buy, sell, and move assets, but get paid for them as well.
There was just under $1.8 trillion in adjusted stablecoin transaction volume in June. Source: Visa
The return on investment from every single component of this equation is big. Combined, they can yield colossal advantages. McKinsey partners even found that digital supply chain tools could make inventory reductions of 35-75% possible through better planning.
More conservatively, from my experience in the field, just switching away from the existing cascades of spreadsheets and electronic data interchange (EDI) messages can allow firms to run most supply chains with about 20% less inventory at the same service level. That’s worth billions in working capital in most industries.
It gets better from there. Smart contracts reduce the time required to handle many business contract rules from days to minutes and cut the costs of administration in half.
Microsoft began moving its Xbox video game network onto smart contracts for handling royalties and cut the time to access monthly royalty statements from 45 days to four minutes. All that while handling more than 2 million transactions a day.
And once you have inventories, contracts, purchase orders and invoices onchain, you can go after working capital directly as well.
When you can prove your purchase order originates from a top-quality buyer, you can access credit for less. And when you have full visibility into inventory and delivery status, you can factor receivables immediately and efficiently.
The possibilities and the returns are big. The use cases are obvious. It’s time to try again.
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About the author: Paul Brody is the Founder and CEO of Nightfall Networks, a blockchain technology company focused on building robust privacy systems for enterprise users. He is the former Global Blockchain Leader at EY and the former Chairman of the Enterprise Ethereum Alliance.