Why Blockchain Matters

Monday Jul 25th 2016 by Guest Author

Blockchain offer opportunities for cost reduction and innovation, and some view it as having the potential to become the business equivalent of cloud computing.

by Bernard Golden

If your familiarity with Bitcoin and Blockchain is limited to having heard about the trial of Silk Road’s Ross Ulbricht, you can be forgiven -- but your knowledge is out of date. Today, Bitcoin and especially Blockchain are moving into the mainstream, with governments and financial institutions launching experiments and prototypes to understand how they can take advantage of the unique characteristics of the technology.

Why Blockchain?

The obvious question is why they’re all so interested in blockchain. The answers vary, naturally, but they seem drawn by two opportunities: cost reduction and efficiency, and innovation. While the outcomes can be very different -- after all, cost reduction and efficiency typically focus on improving the as-is state of affairs while innovation disrupts or displaces the existing order of things.

Intriguingly, two characteristics of blockchain underlie both motivations: decentralization and immutability.

●  Decentralization: Unlike most existing transactional systems, which require a centralized system of record run by a trusted authority, blockchain distributes the system of record (typically referred to as a distributed ledger) across multiple parties; conceptually, this ledger can run on thousands of nodes spread across the world. Decentralization avoids the problem of a centralized entity reaping outsized rewards due to its gatekeeper role as well as preventing it from committing fraud.

●  Immutability: Transactional systems built on database technology have the ability to alter records after initial entry. While updates that reflect changing status are important (e.g., changing a person’s marital status from single to married), updates also provide the mechanism for fraud. Blockchain operates differently than a centralized database -- instead of altering a single data entity, it attaches a new transaction that refers back to the last record. Thus, a person getting married would be represented by a married transaction that would point back to the person’s previous status of single -- and if the status were already married, the new marriage transaction would be rejected (in many nations that prohibit multiple marriages).

These characteristics support both efficiency and innovation. Distributed ledgers hold the potential of streamlining many financial institution payment mechanisms. International payment transfers, for example, are notorious for requiring chains of financial institutions to transfer money from one to another -- sometimes five or six just to send money from, say, Nigeria to Singapore. A blockchain would require a single payment to be sent from one institution to another, with no need for intermediary institutions that, in essence, vouch that the preceding institution can be trusted by the downstream one. Since every one of the intermediary institutions requires payment for its vouching service, this could cut payment transfer fees significantly. It would, as another benefit, reduce the time required for an international payment from days to minutes. Consequently, banks all over the world are evaluating how they can apply blockchain technology to this type of transaction.

Blockchain Experimentation

From the innovation side, the Swedish Land Registry is testing a system to place real estate transactions on the blockchain via a mechanism called a smart contract. Anyone who has ever bought or sold a house has dealt with the overwhelming piles of paper that constitute a transaction, any of which can be mislaid and interrupt the deal’s progress. And has also dealt with the expense of title insurance. A blockchain-based system that captures all relevant documents electronically -- and has the current transaction point back to the previous transaction where the current seller was the buyer -- would improve the system immensely, and make possible new kinds of transactions.

You probably are asking yourself what a smart contract is. Simply stated, a smart contract is a transaction -- i.e., a contract -- that is represented in code rather than in a written document. In the example of the Land Registry, the real estate transaction, including money transfer, document exchange, and title search, would be defined and executed by a code-based smart contract.

Want to understand smart contracts better? Jumpstart your knowledge by downloading this free white paper that describes the four benefits and three challenges of smart contracts.

Blockchain Vendors

And just as IT users have jumped into blockchain technology with enthusiasm, so too have vendors. IBM is participating in the Linux Foundation’s Hyperledger project and helped jumpstart it by donating blockchain code. Hyperledger has attracted a large group of sponsors and participants that are interested in building blockchain-based smart contract applications. It also offers support for blockchain environments on its SoftLayer cloud infrastructure.

Microsoft is also engaged with blockchain technology via its Project Bletchley. Bletchley is even more ambitious than Hyperledger, in that it provides a cloud-based execution environment akin to IBM’s. But Bletchley goes well past that, in that it offers:

●  A smart contracts marketplace, facilitating easy adoption of the technology

●  A blockchain middleware offering, with connectors to identity management and security functions

●  Something called Cryptlets, which can best be thought of as off-blockchain encrypted functionality necessary to help smart contracts operate. For example, if you have a futures contract that needs to get current pricing for, say, wheat, an obvious problem is where to obtain the price. A cryptlet could provide the price from an encrypted execution engine that would prevent fraud from occurring (since manipulating the wheat price would be an obvious way to defraud one of the parties to the wheat contract).

The obvious conclusion you should draw is that if you’re not actively studying and experimenting with blockchain, you should get started. The technology has rapidly moved from the quasi-criminal status it was associated with for a number of years to an important initiative by mainstream institutions.

I believe that blockchain will become the business equivalent of cloud computing -- a convenient, less expensive offering that disrupts an existing ecosystem. And, just like cloud computing, the earlier you get started the faster you’ll start to see results.

About the author: Tech visionary Bernard Golden was named by Wired.com as one of the ten most influential people in cloud computing. He is the author/co-author of five books on open source, virtualization, and cloud computing. He is also the author of a free whitepaper about smart contracts

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