In certain circles, blockchain is touted as important an innovation as the creation of the internet. That kind of headline certainly attracts attention—and investors—but what is to be gleaned from that kind of statement?
The internet had existed in academic and military domains for a number of years before it caught on in the late 1980s with early adopters. Through the 1990s we saw the worldwide web emerge that later became the dominant way in which people interacted over the internet—at least until the rise of the mobile and app economy that continues to dominate the internet today.
Much of the parallel with blockchain and the internet is based on how the internet started off. It was a complex and arcane place populated with highly technical early adopters, a place that over time evolved to become much more inclusive and to become embedded in daily life. It is now difficult to imagine a world without it.
Many of the early adopters working with blockchain can envision a future much the same: where the world and how we see it becomes fundamentally altered by an almost invisible technology that underpins almost everyone’s daily life.
What do we mean by Blockchain?
Blockchain is best known as the technology that underpins bitcoin. Bitcoin was the first and most widely used “cryptocurrency”online. While it initially met with considerable scepticism, it has continued to grow and is currently accepted as online payment by a number of retailers, including Dell, Microsoft, Shopify, Tesla, and Whole Foods.
This ongoing, albeit slow success, has allowed many people to study how bitcoin and, by extension blockchain, works. As it happens, the technology making things happen has been found to be exceptionally robust and highly extensible. Since its introduction a number of new and existing businesses are currently developing new products based on blockchain. In particular, the financial services sector is investing heavily in blockchain startups and funding research initiatives worldwide.
It is a rare moment when the world’s largest banks, insurance companies and financial services companies, organizations that tend to be very conservative, start getting publicly excited about and begin investing in an emerging technology.
At its core, a blockchain is a distributed database where all participating parties have access to the entire dataset. As the name suggests, the data is stored in blocks that are chained together. One or more transactions make up a block, which when bundled together with the fingerprint of the previous block are run through a complex mathematical process to create a block.
This combination of strong cryptography and linking blocks of transactions in a chain make for an exceptionally secure place to store records.
Trust at Scale
Other than handing over cash in a face-to-face transaction, say buying an apple at a roadside stand, almost every transaction made today is mediated by a third party: buying things with a debit or credit card, transferring money, registering a title for a property, or paying taxes. Almost everything we do has some kind of middleman to mediate between the two parties. The government keeps records on land transfers, banks use the Society for Worldwide Interbank Financial Telecommunication(SWIFT) to move money, merchants use banks to provide access to credit card services, and the list goes on.
The reason for all these third parties is trust. Both sides who may or may not trust each other need to trust the third party, that is what makes it easy to send money to relatives over seas or purchase gas with a credit card.
However, the problem is that sometimes these centralized third-party solutions do not scale as well as they could. Depositing a check at an ATM can take five days to clear while the two banks talk and move money back and forth. Trust can take time and things need to be done carefully so that the correct amount is debited from one account at one bank and credited to another account at a different bank. Thus, the time involved in a transaction can present a problem in scaling.
The volume of transactions also presents a problem. Credit card companies spend vast sums of money to provide almost instant and secure authentication of transactions. Even then there can be problems as anyone who has tried to buy gifts onDecember 24 knows. Computing resources that process transactions are finite. Scalable cloud computing sounds wonderful, but there are still physical limitations in the real world.
What blockchain has the potential to do is remove, or at least limit, in many ways the dependency on third parties to verify and record transactions. Instead of trusting in a third party, the trust lies in the mechanism and the ability of all participants to verify a transaction. Money moves from the buyer to the seller (and the network operator and taxation authority) immediately, and in a verifiable way that all participants can see.
Consensus and immutability
Blockchain operates on an enforced kind of consensus. Because all participants are operating independently either submitting transactions to be processed or creating the blocks in the chain, there is the potential for things to happen concurrently. In these cases, the network resolves these occurrences with a simple rule of “longest chain wins.”
The network and all participants continue and the longest chain becomes authoritative. This enforced consensus is what creates the immutability of the records stored in the chain since each block in the chain is built from the preceding block and, in turn, is used to build the next block. With this process it becomes exceptionally difficult to alter a record since it would require all blocks after it to be changed as well.
This creates a kind of built-in risk management system when used with the longest chain rule. Merchants can set their own levels of confidence. Low-risk transactions like buying a cup of coffee can be considered safe after they are two blocks deep.However, a million dollar house might need to be several hundred blocks deep to be considered safe. The further back in the chain, public chains at least, the more permanent the transaction can be considered.
The challenges and opportunities ahead
The benefits for faster, lower cost, more immediate, and more easily verifiable transactions as they apply to finance are easily envisioned. Beyond that the implications for blockchain get much more interesting, and like the internet have the potential to make significant and long-lasting changes to our world.
When it initially came to market, the automobile was simply considered a faster horse. At the time, the changes the automobile brought about were hard to envision. That said, here are some of the areas being actively looked at and invested in:
- Identity and authentication
Security online is increasingly becoming a priority for businesses, governments, and individuals. Weekly, we read about data breaches exposing people’s identities, password hashes, credit card numbers, email addresses, and all other types of personal information.
It is important to keep in mind that while blockchain is not a magic bullet designed to solve existing problems, it is rather anew way of looking at things that can create ways of doing things that will avoid the problems previous methods created.
In the case of stolen credit card numbers, what if there were no credit card numbers—only people’s public key addresses?
2. Smart contracts
Other than regular financial transactions, the concept of smart contracts coded into the transaction has the more immediate potential. Imagine, someone agrees to buy 100 widgets from a supplier as long as the exchange rate remains within a given range. The transaction itself would know that, and if the exchange rate fell out of the range, ownership of these widgets would revert to the supplier without any intervention.
The potential for smart contracts is almost limitless. Imagine if your ERP system could allocate budgets to departments where the allocation and spending rules were built into the “money.” Audits or waiting for approvals would cease to be relevant since the allocation simply could not be spent incorrectly.
Deposits on large purchases would immediately be returned or forfeited pending approval or expiration of an agreement without any intervention.
Suffice to say, there is tremendous potential to embed business rules directly into transactions that can execute themselves when conditions are met.
- IoT and micro Transactions
One of the most exciting potential applications is how the technology can be applied to the Internet of Things (IoT). With an estimated 6.4 billion connected devices by the end of 2016, managing these devices will be no mean task—as evidenced recently by the use of IoT webcams to create a DDOS botnet. As these “smart” devices continue to proliferate, centralized management of these devices will become completely impossible.
Depending on individual consumers to manage their own devices is also not a realistic proposition. At its core, managingIoT is a problem of scale, something blockchain is good at solving. Blockchain presents a unique set of capabilities to allow devices to “manage” themselves. Companies could publish instructions, updates, or configuration information on a blockchain that devices autonomously read and verify to execute new instructions.
This opens the gate to a new type of transaction. Typically in business we talk about B2C or B2B: Business to Consumeror Business to Business types of transactions. With the proliferation of autonomous devices we now need to look at how to handle Machine to Machine transactions or M2M, which brings us to micro transactions.
Micro transactions have long been the Holy Grail of monetization of the internet. Almost all “free” services on the internet are driven by advertising revenue, along with the associated privacy implications that come with collecting personal information. While micro transactions have long been thought of as a way to enable “pay as you go” types of services, the costs of the transactions typically outweigh the value of the transaction itself. With M2M transactions there is no personal information or even a person to receive advertisements. However, blockchain with its much lower (and decentralized)transaction costs, along with its ability to bundle or hold transactions in escrow until a minimum is met, presents a clear path forward for not only monetizing IoT, but also providing much needed security and management of devices.
As a quick example, imagine a vending machine that pays its own electricity, orders its own supplies, schedules its own maintenance, and deposits the profits on its own once a month. This is all mostly possible now, but would typically require a large upfront investment for centralized management—probably a fairly large fleet of devices to tip the economy of scale enough to make it profitable. Now if transaction costs could be reduced, and each machine kept its own ledger and could bid on its own supplies, the economy of scale could eventually come down to the point where an individual device could be profitable, and multiple devices working together autonomously even more so, bidding on locations and moving themselves to more optimal locations.
Self-driving cars are another near-term technology that has the potential to leverage some of the technology of blockchain.When an individual car is not being used by its owner it can be assigned to a fleet for hire. Networks of cars could negotiate bulk purchase of fuel or electricity in automated markets, drive themselves to the dealership for maintenance, and pay directly using money they had earned by hiring themselves out.
- Trusted Computing
In the case of smart contracts business rules can be executed when conditions are met, so why not actual computer code?In fact, the ideas are one and the same. Trusted computing is central to how much of the internet runs today. Websites that take credit cards can be trusted, encrypted email and messages get to their recipients unaltered, applications and updates from a manufacturer can be trusted.
At the moment, for the most part, all this works relatively well and the world continues apace. That said, the current model of security for much of the world is based on security certifications issued by centralized third parties—does this sound familiar yet? All these factors—criminals becoming increasingly sophisticated, nation state type actors involved in espionage, the sheer scale of the internet and its continued growth—come together to paint a grim picture of the future of security and privacy.
Many of the same concepts that apply to smart devices that comprise IoT can be applied to the array of servers, virtual machines, neural networks, and databases that make up the back end of the internet, generously described as the cloud.The cloud, of course, simply means “someone else’s computer.” This is not to say the companies currently dominating this market have not done an excellent job of securing and automating their networks, but we are again back to the idea of scale, at some point centralized management begins to break down.
While blockchain is not going solve all security issues overnight or spontaneously cause the downfall of oppressive regimes, as a technology it does offer us a path out of simply building bigger more complex solutions based on centralized trust models. The answer is likely going to fall somewhere in between, but we now have a working model of how to build a secure distributed network that can be trusted by all participants.
Does it Scale?
The central story behind blockchain would seem to be that of scale. Throughout most of our history, many systems or network shave had a hierarchical structure. Trust, such as it is, starts at the top and gets delegated downwards, either directly or through intermediaries. As the problem at hand grows and gets larger so does the hierarchy, adding more people, computers, cars, banks, regional governors, post offices, and more. At its core, blockchain offers a different way of thinking about these problems and of the ability to create a truly consensus-driven distributed network.
This is not to say that all business is now conducted in public through anonymous transactions. In the case of credit card or debit networks it simply replaces how transactions are handled internally. Cardholders still have agreements with the network operator and merchants, and banks are still members of the network, but transactions now happen faster, at a lower cost, reduced risk, and payments occur in real time.
Our ability to manage the devices and services we depend on to power the internet are coming under increasing pressure as the internet continues to expand at an ever-increasing rate. One day, the internet will be too large and complex to properly manage and maintain using current methods.
Blockchain certainly is not going to replace all hierarchical structure or obviate the need for trusted third parties, but it is another very compelling tool we can use to help shape and create the future.