Blockchain's promised technical and industrial revolution must first overcome hurdles

The deployment of blockchain technology has mostly focused on digital currency, financial exchange and personal payment applications. Other use cases in global trade, supply chain management, IoT and contract management are being studied to determine blockchain's viability to enable new efficiencies and ways of doing business. Several are making their way into production. Here are a few of the more critical considerations for blockchain use that need to be addressed prior to production release, or at least during proof-of-concept evaluations.

The 451 Take

We find it interesting that many technologists familiar with blockchain liken it to the state of the early internet, actually pre-internet, when Arpanet first linked four university computer systems in 1969. It took roughly 25 years for the internet to burst on the scene – changing the way we do everything. Yet, and in spite of, such a long maturity curve, investors and entrepreneurs are falling over themselves to bring blockchain-based products and services to market today. Upon closer examination, perhaps rightfully so. Blockchain's distributed and decentralized architecture can potentially redefine future cloud computing architecture because of its uncanny ability to disintermediate middlemen. That's why banks are so concerned, and are flocking to understand blockchain. Does Amazon, Alibaba, AWS, Google, Microsoft, Oracle, IBM and the global ICT industry have anything to worry about? Not yet. There are still plenty of technology and business issues to overcome – the most pressing of which we analyze herein.

Confusion around blockchain

For any innovative technology to take hold, potential users must be able to understand its capabilities and benefits and how it works, articulate this understanding to others for approval, and then apply it for practical use. However, most people exposed to the blockchain concept fail to understand it, and those that claim they do often articulate it inaccurately.

In its simplest definition, a blockchain is a distributed and decentralized database, shared among known or anonymous participants, that maintains a continuous list of records (transactions). Participants in a blockchain do so using technology called blockchain nodes. Each node (a computer connected to the network) uses cryptography to secure strings of records (called blocks), and algorithms that enable consensus among participants that new records are valid, and if not, are rejected.

It tracks the chronology of records (provenance), and assures that records cannot be modified after being created (immutability). A blockchain builds trust among known and anonymous participants as peers without the need for a central authority. By distributing and securing records management, and authenticating records using distributed consensus algorithms, any participant can confidently engage in transactions or commerce with any other participant in the blockchain.

Market inundation

Aside from confusion over how blockchain technology works, the global market has been inundated with literally thousands of vendors, consortia, investment groups, and consultants all hoping to stake a claim. Use cases range from board-based blockchain-enabled applications development platforms, through cryptocurrency and fintech, on to enterprise use cases for global trade and supply chain management, government services delivery, and all the way to environmental controls and global social engineering.

The phrase 'irrational exuberance' – once used by US Federal Reserve Chairman Alan Greenspan to describe the dot-com phenomenon – can be once again used to describe the new blockchain phenomenon. The implication here is that those now considering blockchain find it difficult to separate the 'wheat from the chaff' – in other words, knowing which vendors are credible and sustainable, and which are not.

Nascent frameworks and development tools

Many vendors staking a claim to the blockchain-based markets are doing so by crafting application development frameworks that make use of blockchain technology for distributed data integration and transaction management. All are virtually brand new (with little real-world experience in enterprise use cases), and all promise to make experimentation with blockchain easy for enterprises.

Indeed, blockchain has been in use since bitcoin was first introduced in 2009 – an eternity, to some, in internet years. Nevertheless, it's still quite immature. In fact, many developers close to the technology note that today's blockchain is in a state similar to the Arpanet technology that was first conceived in 1967 and deployed in 1969, providing the foundation for today's internet.

Perhaps the most mature commercial offerings for enterprise use comes from IBM. It is a substantial contributor to the Hyperledger project, an open source community sponsoring the buildout of blockchain-based application development tooling. Indeed, Hyperledger's first and flagship tool, the Hyperledger Fabric 1.0 was only formally introduced in July 2017 – so there is still plenty of room for lesson learning and evolution.

Data management

Most blockchains in use today drive cryptocurrencies like Bitcoin or Ether. Very little data beyond tracking state is transmitted between the blockchain nodes in this use case. However, a great deal more data may be needed when a blockchain is used in enterprise applications where smart contracts (computer protocols or algorithms that automatically enforce and execute the terms of a contract whenever the conditions of the contract are met) may execute terms negotiated among supply chain members.

This creates issues as to where the data is to be stored, persisted and secured. Should the data remain within the blockchain node, and if so, what is the data capabilities of that node? Otherwise, should data be stored in a central or other distributed repository, with the nodes tracking pointers to and/or the state of the data? If so, does this centralized authority in some way potentially defeat the distributed trust supposedly enabled by a blockchain? These questions are not insurmountable, but indeed must be addressed for each use case.

Integration

Very little development has been done to address how best to integrate blockchain nodes with other data sources and/or systems of record within enterprises. In fact, we have discovered, to our surprise, that many industry-leading integration vendors have completely overlooked blockchain as an integration framework itself.

Moreover, many fail to recognize that blockchains capture valuable data needed to integrate and execute transactions between applications, systems of record, businesses and trading partners. Consideration of the unique workings of a blockchain still needs to be addressed by vendors within various integration markets if blockchain is to become an efficient distributed system within and among enterprises.

Latency vs. scale and consensus protocols

Consideration must be given to the size and speed needed of a blockchain, given its specific use case. Blockchains developed for cryptocurrencies generate small transactions (roughly 450 to 600 bytes of data). However, the number of users of a cryptocurrency can increase exponentially, thus substantially increasing the number of blockchain nodes needed to support latency and throughput.

For example, one of Bitcoin's greatest challenges is processing time – it can take up to an hour to approve a transaction. Private- or consortium-based blockchains for enterprise use cases may execute significantly greater multi-megabyte transactions, for example, when smart contracts are used. In such use cases, scale and latency are also affected by the type of consensus protocol used to validate transactions.

Many protocols are now available to govern consensus, each with their own performance characteristics. Capacity planning needs to anticipate future scale, latency and throughput needs of a blockchain depending on its use case. The blockchain infrastructure should be flexible enough to support, or at least interchange, multiple consensus protocols.

Minimal viable ecosystems

An issue of blockchain that is not given enough attention is how multiple parties come together and agree on solving a common business problem, and also agree on how best to solve it. Many enterprise uses cases of blockchain attempt to improve inter-enterprise business processes. For example, in global trade multiple parties must come together, and agree on how documents for goods and credit are exchanged, approved and reconciled prior to funds being disbursed or escrows released.

So too, in supply chain management and automobile procurement. Each independent party must agree to change the way they do business, agree to use a common process and application, and be confident that the new mechanism in place can protect their business and economic interests. Therefore, consortium-based blockchains require a minimal viable ecosystem (MVE) whereby enough of the right parties come together to execute the new system and realize its intended benefits – without such an MVE a blockchain effort will fail.

Industry standards

Industry standards are sometimes a double-edged sword – they represent a great place to start, but can quickly deviate if not practiced with discipline. Some define an industry standard as the point from which all customization begins. Indeed, some standards are useful.

In the case of blockchain, Open API definitions are likely to help the evolution of how data within and across a blockchain is captured and stored, and how integrations with enterprise systems can best be designed and executed.

Regulatory efforts

As business professionals seek to learn about blockchain technology and how it can be used, so too are regulatory bodies. In fact, 2017 can be considered the year that regulatory bodies around the globe have awoken to the security, sovereignty and monetary risks posed by cryptocurrencies.

Many nations fear expansion of global money laundering, and how personal fraud can perpetuate. Their efforts are likely to directly affect the business models of fintech vendors and startups developing blockchains within and for the financial services industries. Nothing can be said for sure as to how such regulations may affect enterprise use of blockchain for things like global trade, supply chain management and the use of smart contracts that automate the execution of contract terms, upon a transaction trigger or change in state, without the need for human intervention.

Therefore, the best remedy is to monitor the regulatory bodies most likely to affect the blockchain use cases in consideration.

Security

Blockchain is not without its security risks. A common approach to defeating a blockchain is by 'forking the chain.' A hard fork is a change to the consensus protocol that makes previously invalid blocks/transactions/records valid (or vice versa). Such an event requires all nodes or users to engage in remediation efforts. Indeed, malicious attempts to defeat blockchains will persist (e.g., Ethereum's DAO case, where a hacker took advantage of a technical loophole and amassed a significant amount of Ethers).

Smart contracts operate in unregulated territory, and moving law to the digital space presents challenges. If code becomes the law, correcting bugs in the code may result in breach of contract, and gaps in the code can result in financial losses. The upside is that blockchain has already been subjected to one of the most aggressive proving grounds available: a public arena where fraud and malicious activity often go hand-in-hand with the use of cryptocurrency built on blockchain.

The cryptography techniques used to enable blockchains are founded on mature science. However, their applied use in blockchains still requires considerable discussion, debate and evolution among the open source and IT communities now investing in blockchain technology and related markets.

Business models and economics

Blockchain technology used to automate processes within and among the members of a consortium can impact the current business models, the implications of which need to be understood prior to engaging.

Vendors sponsoring such consortia hope to make money themselves by charging membership fees to sponsor the blockchain. In many cases, their revenue streams and profit models are best guesses right now. So too, very little economic analytics of the costs and returns of blockchain deployment and use is offered outside vendors' system proposals and pricing models.

Vendor landscape

While there are hundreds of blockchain-related startups, few are mature in their efforts to create an enterprise-class development and integration platform. What follows are notable vendors we believe are committed to overcoming the issues discussed in this report. AWS has teamed up with Digital Currency Group to create a blockchain-as-a-service offering for financial services firms.

  • BlockApps is an emerging vendor that is commercializing blockchain technology as an enterprise-grade application development and integration platform. It's building on the latest enhancements to proven blockchain open source implementations, and tackling real-world business problems that it believes blockchain can help solve.

  • Chain Inc offers its Chain Core platform based on the Chain protocol. It's positioned as an enterprise-grade blockchain infrastructure designed to build financial service applications. Ethereum is a decentralized platform that runs smart contracts on a custom-built blockchain. It enables developers to create markets, store a registry of debts/promises, and move funds based on rules. It is also used as a foundation for several other blockchain startups.

  • Everledger uses emerging technology including blockchain, smart contracts and machine vision to assist in the reduction of risk and fraud for banks, insurers and open marketplaces. It offers a global, digital ledger that tracks and protects assets using lifecycle management techniques. It collects an asset's defining characteristics, history and ownership to create a permanent record on the blockchain. It is used by various stakeholders across a supply chain pipeline to form provenance and verify authenticity.

  • IBM is perhaps the most aggressive IT leviathan driving blockchain open source development, as well as its own technology stack. Its Bluemix PaaS has been readied to include integrated DevOps tools for creating, deploying, running and monitoring blockchain applications on IBM Cloud.

  • Microsoft offers Blockchain as a Service to develop, test and deploy blockchain applications. It recently announced its Coco Framework, which is intended to reduce the complicated development techniques needed to meet the operational and security needs of enterprises. It also offers a distributed governance model for blockchain networks – establishing a 'network constitution' whereby members can vote on all terms and conditions governing the consortium and the Blockchain software system.

  • Oracle views blockchain as an encrypted, distributed database shared across multiple computers or nodes that are part of a community or system. In September 2016, it first filed for a patent that describes the use of 'pipeline blockchains.' In August 2017, Oracle officially joined the Hyperledger project, and is now bringing to market its own blockchain development platform.

  • R3 leads a consortium partnership of over 80 leading banks to design and deliver distributed ledger technologies to global financial markets. It collaborates with its partner banks on research, experimentation, design and engineering to bring the users of blockchain technology into the design and production process. Corda, its open source distributed ledger platform, was specifically designed to record and manage financial agreements between financial institutions.

Conclusion

While blockchain is still adolescent (some would say still a toddler), its distributed network ledger technology shows promise of improving upon how inter-enterprise transactions can execute. We believe blockchain has the potential to play a vital role in 21st century cloud and computing architecture.

It also has the potential to disrupt many industries because of its unique ability to eliminate middlemen in markets. Cryptocurrencies, while risky in many ways, have proved that banks may not be needed in many financial transactions. Indeed, there are many other types of middlemen today.

Current hyperscale cloud services providers, and indeed e-commerce vendors, like Alibaba and Amazon, are middlemen of sorts as well – they used cloud technology and APIs to eventually disintermediate many retail middlemen. Can blockchain disintermediate them? Probably not, but it's likely that someone will try.

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