Blockchains

In recent times, there has been an increasing amount of noise around the ‘blockchain’ technology. Some, including IBM in a paper modestly entitled ‘Device Democracy – Saving the Future of the Internet of Things’, argue that it will act as a true enabler for the IoT. This is just about enough to justify some exploring.

BLOCKCHAIN – A DEFINITION

Blockchain technology is rather abstract. Having gone through reports, white papers, and press articles (the best of which are included in the footnote), here is an attempt to define a blockchain and its key features:

A blockchain is a data storage system or database

• Data can include anything from financial transactions to property titles, personal information (identity, health, credit), or a machine’s temperature or vibration records

• Once electronically stored, the data becomes a set of digital assets

• The blockchain database is not kept in a central location but replicated in multiple locations called ‘nodes’ which is why it is said to be ‘distributed’ across a network

• Whilst the database is publicly accessible, the information stored on the blockchain is encrypted, and thus private

• Any new set of data received by one node is broadcast across the nodes network. If deemed to be bona fide by the network (as opposed to a central authority), the new data is accepted and synchronized across locations so that only one single set of data exists on the network at any point in time (‘shared single source of truth’)

• Each node collects new data into a ‘block’ which is to be validated through the solving of a complex puzzle (‘proof-of-work’) requiring significant computing power. The creation of a block is made computationally difficult on purpose

• A number of parties called ‘miners’ compete to solve the puzzle. The miner who succeeds in solving the puzzle and thus in validating a block gets paid a fee

• Once validated and encrypted, the new block of data containing updated information is time-stamped and digitally attached to the previous block of data, thereby forming a chain that starts with the very first block of data ever validated

THE ADVANTAGES OF THE BLOCKCHAIN

The process of recording data is irreversible. Once a block of data is validated and added to the chain, it is made physically impossible to modify it: Anyone who seeks to change a block in the chain has to revalidate that block, all the existing subsequent blocks, and the new blocks which are still being added to the chain. There is not enough computer power available to anyone to win that race. The massive effort required to validate every single block is therefore what protects the entire blockchain and its digital assets. Given the above, the database’s integrity is inherently protected. No central authority is required to play a safekeeping role.

BITCOIN – RELYING ON THE BLOCKCHAIN TECHNOLOGY

Blockchain technology was invented by the Bitcoin creator (whose identity remains unknown) and is at the heart of the Bitcoin payment system itself. In that particular case, transactions (transfers of bitcoins agreed between two parties) are recorded in the database which most refer to as a ‘distributed ledger’ since the data represents bookkeeping entries.

500 transactions form a block, which is validated and encrypted (hence the term ‘cryptocurrency’) by powerful computers to be then attached to the previous block of transactions as part of the chain. The bitcoin balance of any bitcoin owner is assessed by calculating all the bitcoins earned and spent by that individual since the very first Bitcoin transaction in the world. The balance can be determined on a real-time basis, which makes it impossible for a party to spend the same bitcoin twice (simultaneously).

Because the system is inherently tamper-proof, no trust between transacting parties is required. Parties can safely transfer bitcoins on a peer-to-peer basis without any central authority or a trusted intermediary such as a bank (who would typically check the availability of funds and then process the payment through other intermediaries).

APPLICATIONS IN FINANCE

What works for bitcoin can work for traditional currencies (e.g. cross-border payments or remittances), gold coins, stocks, and bonds following the same principles. This is naturally why banks are investing in this technology.

APPLICATIONS BEYOND FINANCE – IoT ENABLER

IoT can use the blockchain as its backbone. To get there, ‘smart contracts’ must be integrated in the blockchain - a concept that is at the core of the Ethereum Project.

Depending upon the data (location, temperature, pressure, vibration, etc.) which is recorded in the blockchain, the smart contract can execute a code and send instructions to devices that are connected to the blockchain (e.g. turn the temperature down, order a replacement part). That way, devices can be linked and speak with other devices autonomously.

Blockchains are also directly relevant to the supply chain: a product (e.g. frozen pizzas or diamonds) could be traced from its origin to its destination, with properties (e.g. temperature) checks safely recorded along the way. When the product arrives at the destination, the smart contract would automatically and immediately send the payment to the supplier (‘distributed contract system’).

The beauty of a blockchain is that it is run on a fully distributed basis, which makes it both reliable and private. There is no centralized authority that can abuse the data or extract an economic advantage from its position as an intermediary (e.g. fees and commissions). As IBM puts it: “In our vision of a decentralized IoT, the blockchain is the framework facilitating transaction processing and coordination among interacting devices. Each manages its own roles and behavior, resulting in an “Internet of Decentralized, Autonomous Things” – and thus the democratization of the digital world.”

BLOCKCHAIN – CHALLENGES

Scalability represents the main challenge for blockchain technology given the need for increased computer power (with implications for the environment). Not surprisingly, IT equipment companies embrace the blockchain concept.

MICRO IMPLICATIONS

Companies that have been playing a trusted, intermediary role such as banks and credit card companies will need to adapt. The same may be true for newer ventures such as Uber, AirBnB and Amazon who benefit from keeping all user information centralized and act as middlemen taking a cut of all the transactions.

Finally, if robotics is primarily threatening employment on the factory floor as part of the 4th industrial revolution, blockchain technology, if successful, will have a similar impact on back-office resources as fewer and fewer are required to process transactions alongside the supply chain. New economic opportunities, new social challenges.

Sources:

• Wiki, White paper on Ethereum, September 2016

• The Economist, “ The great chain of being sure about things”, October 2015

• The Wall Street Journal, “IBM pushes Blockchain into the Supply Chain”, July 2016

• Harvard Business Review, “The Impact of the Blockchain Goes Beyond Financial Services”, May 2016

• Computerworld, “Understanding the Blockchain Hype Why much of it is Nothing More than Snake Oil and Spin”, September 2016

• Security Intelligence, “Ethereum, a Second Generation Blockchain for the IoT”, December 2015