9 Reasons Why Blockchain Projects Fail (and How to Succeed)
At least 95% of enterprise blockchain projects end in failure. Was yours one of them, or could it be on the same path to failure? The slow death of blockchain consortia has everyone in the industry thinking the worst.
When blockchain advocates say, “There’s nothing you can do with a blockchain that you can’t also do faster and cheaper with a traditional centralized data infrastructure,” it’s hard not to wonder if they’re right. But people are clearly looking to solve real business problems with blockchain, and no centralized infrastructure has demonstrated the transparency and trust at such low cost that blockchains can deliver.
Here are the main reasons behind blockchain project failures:
Lack of vision and understanding of the purpose of blockchain
No one wants to buy a blockchain just to have one; a blockchain in itself is not a solution – it is a technology that, when built upon, can deliver efficient data exchange within consortia. In some industries – healthcare, energy and other critical services – the value proposition of blockchains is its transparency, traceability and reliability throughout the supply chain. However, the reason why some people want to adopt blockchain is the same reason why others are so against it: They benefit from information asymmetry. Take the used car market as a good example. A blockchain will not stop dishonest or malicious activity, but it will make it easier to detect both deliberately dishonest actors and accidental honest mistakes. The solution? Stay where transparency and accountability are wanted and needed: Critical, regulated supply chains with governance, risk and compliance requirements. Avoid use where transparency is not desired.
Building a consortium
The choreography and stakeholder alignment involved in blockchain is hard work, especially if not all stakeholders are aligned with your mission or members will come and go. This is perhaps the biggest problem of all for enterprise blockchains – convincing all stakeholders that the project is worth pursuing, looking past participants’ self-interest and aligning with a greater good. It is not easy to overcome the tragedy of the commons, especially if there are huge infrastructure costs for everyone involved and everyone has to take a leap of faith at the same time. If blockchains need consortia to succeed, it is fair to say that the problem is not the technology, but how to get it adopted – organizations must be free to come on board when they are ready. This is where a good SaaS model can help with frictionless onboarding, infrastructure setup and maintenance. In fact, a SaaS model can remove the step of building the consortium altogether!
Fear of choosing the wrong technology
Nobody wants to end up in technical debt. With so many blockchain projects in active development and the complexity of the space, it’s hard to see which technology is in the lead today. It’s even harder to predict whether something better will come along to replace it. At this point, it makes sense to use technologies that protect against lock-in to future obsolescence and allow for quick pivots. Solutions that use open APIs and abstract complexity with layered architecture means you can swap components if necessary when better options emerge. Also, look for solutions that allow you to export your data whenever and wherever you want.
The expenses of Blockchain
If every business in every step of the supply chain needs to use blockchain to make the project successful, all players, big and small, need to be on board. But the cost-to-benefit ratio will not be the same for all players. Blockchain architects and developers are not cheap. It takes a developer between one and a half to two years to become proficient in writing Solidity smart contracts. After becoming proficient, they spend 60% of their time mitigating vulnerabilities, 30% optimizing gas costs, and only 10% building core functionality. Even when it is up and running, costs are not reduced. Operation and maintenance of the blockchain node infrastructure does not come for free. Not all players can afford the consulting fees required by the big integrators, and if the economics don’t make sense for everyone, then the whole project fails. Look for improved blockchain-as-a-service solutions that cut through the complexity while making the solution available through a simple API that any developer in any organization can use. Also explore pricing options that make sense for your organization’s budget.
Competitor-controlled platforms
It is incredibly difficult to build trust among competing companies. The IBM-Maersk project TradeLens, for example, had such trouble convincing other shipping companies to sign up and share sensitive data on its platform that it was suspended in November 2022. Although blockchain technology promises neutrality, the optics of proprietary platforms from tool providers will also face the same challenges when competing tool providers do not trust the integration. In the same way that you and your competitor can both use Microsoft Office 365, blockchain solutions do not require you to be friends with your competitors or know if you are on the same platform. So choose a neutral platform that poses no competitive threat to your consortium.
Lack of cybersecurity hygiene and understanding of cryptographic key management
“Not your keys; not your crypto’ is still true when applied to the enterprise blockchain, so it’s important to know where your keys are located and how they are protected. As many enterprises have just made the leap from usernames and passwords to better identity and access management (IAM) solutions using single sign-on (SSO), two-factor authentication (2FA) and other more modern techniques, wallet key management may be a step too far for them. Look for solutions that take care of the hard work of cryptographic key management to protect your wallet keys. Since anyone with access to your keys can impersonate you or your company, it’s even better if your solution integrates hardware security modules (HSMs) to protect those keys and connect them to your company’s identity system.
The environmental costs of proof-of-work (PoW)
The misconception that blockchains are bad for the planet stems from the fact that the total energy consumed to mine bitcoins can exceed that of a nation (the entire population’s needs for light, heat and industrial power!). But not all blockchains rely on proof-of-work to reach consensus; even those that once did (Ethereum) have moved on to more energy efficient consensus protocols. Private blockchains where the participants know each other do not need to engage in such waste. Don’t assume that all blockchains use proof-of-work; in fact, the vast majority do not now.
Unpredictable budgets
If public blockchains are the solution, then be prepared for a host of other problems. Public blockchain networks are not driven by altruism – gas fees recover operating costs for node operators, and high pricing encourages users to delay transactions when the network is congested. Most businesses don’t like uncertainty, and when fees are affected by forces beyond their control, it makes financial planning incredibly difficult. Tokenomics has attracted a gold rush of institutions and individuals seeking their fortunes from what some now describe as the mother of all Ponzi schemes. When a token appears to benefit real network participants, speculators rush in to drive up its price. Your once-useful network is now too expensive to operate, and when the finances don’t match, you’re back to square one. It would have been better to start with a blockchain without a utility token in the first place. If your blockchain network does not need to use a cryptocurrency, choose one without it.
Compliance with regulations
Blockchain system designers must tread very carefully with regard to personally identifiable information (PII) and, in some regions, the right to be forgotten as legislated under the European General Data Protection Regulation (GDPR). Not only that, many companies are uncomfortable with forced transparency that will leak information and weaken competitive advantage. Private permissioned systems with fine-grained control over who gets to see what data can solve these problems.
What does it take to start a successful project?
Now that you know the pitfalls, what will it take to make your enterprise blockchain project a success? First, keep it simple with easy onboarding. Not everyone in the consortium will be on the same budget cycle or have the same amount to spend, nor should they. Many SaaS offerings start with a freemium plan that significantly lowers barriers to entry, and blockchain platforms are no different. Transparent pricing can help you onboard the consortium with minimal friction as and when they are ready on a plan that suits them.
Extend existing processes by strengthening or simplifying them. Blockchain should bring greater efficiency – getting the right data to the right place at the right time to help people make the right decisions. By automating the reconciliation of data, people can get on with their jobs instead of wading through paperwork or searching for available data. If the process is not ongoing or automated, blockchains may not be the best solution.
You should aim to make blockchain a technology that blends into the background. There is no point in trying to explain wallet keys, nodes, consensus mechanisms, smart contracts, and fungible and non-fungible tokens (NFTs) to some non-technical person who just needs to get on with their day job. Having a back-end chain-of-custody platform to verify data means people can get on with their jobs with confidence. If anything, the only thing you want in the foreground is a symbol, such as a small blue check mark, to show users that data can be verified.
It is also necessary to ensure backward compatibility; technology that connects to legacy systems, operations and behaviour. API-first platforms are built to connect to new and legacy systems. This is crucial for smooth usage – ripping up and replacing existing tools and applications would be incredibly painful. Convincing all businesses to adopt the same end-user-facing tool will be impossible. It is much easier to enable verifiable data exchange directly within the various tools that each organization already uses in its operations. Blockchain platforms with open APIs should enable developers to quickly integrate any data source or destination.
Finally, you need data object alignment. Of course, it makes sense that everyone in a network should speak the same language when exchanging data. Look for a blockchain SaaS platform that is data object agnostic and can handle any asset or event captured as a JSON document. Some platforms offer templates that suggest how to get started quickly rather than starting from a blank page on a command line. Internet Engineering Task Force (IETF) standards are emerging, such as Supply Chain Integrity, Transparency and Trust (SCITT), which will help harmonize ledger-recorded testimonials.
