Blockchain technology emerged as one of the hottest subjects of 2015, as major banks, corporations and even governments began to weigh in on the technology that makes bitcoin work.
Pete Harris, Principal at Lighthouse Partners, answers some key questions about blockchain and where it is headed this year.
The blockchain term has become much used over the past few months. So just for those who may not know, what is it and how is it related to bitcoin?
Block chains are fully distributed data stores, which contain data that is immutable – so that once a data item is written to a blockchain it cannot be changed. This level of distribution and security is achieved using internet communications protocols and complex cryptographic techniques.
The bitcoin cryptocurrency is the most well known example of blockchain technology. With bitcoin, two individuals who might not know one another at all can exchange money directly, with no third party bank or payments service involved, and the receiver has absolute confidence that the sender owns the money that it is sending. Anyone, anywhere in the world, can send and receive bitcoins if they have an internet connection and some free, open source, software for their computer or smart phone. For this reason, bitcoin’s blockchain is characterised as a Public Blockchain.
So is it necessary to buy bitcoins in order to use blockchains?
No, blockchains come in many different designs and work in different ways. The cryptographic technique that powers the bitcoin blockchain – it’s known as Proof of Work – employs high power transaction processing nodes that secure transactions by performing complex math problems. Proof of Work – which rewards its transaction processors with an amount of bitcoin per transaction – is very good at providing a key benefit for bitcoin, which is allowing 2 individuals not known to one another to transact business with confidence.
However, it is often the case that business is transacted between individuals and businesses that do know one another. These entities still want secure records to be kept, but don’t need the overhead of Proof of Work to authenticate the entities that are party to the transaction. Other mechanisms can be used to secure such transactions and ensure all parties have the same records, and these might not use any form of cryptocurrency. Proof of Stake is one such mechanism, where transaction processors essentially post a security deposit that would be forfeited if they ever falsified a transaction.
Because blockchains built using these alternative designs are likely to be used between entities that have some type of personal or business relationship already, they are often referred to as Private Blockchains, or Consortium Blockchains.
What kind of industries might be impacted by blockchain technology?
Pretty much everything is up for grabs. Given that bitcoin is already live and pretty widespread, then new payments services are already being introduced to replace inter-bank and personal transfers. Such payments would be fast and cheaper than current systems, especially for foreign transfers.
Financial markets banks and securities firms are exploring blockchains in order to make the post-trade processes of trading – clearing and settlement – faster and cheaper.
Essentially, any type of commerce where it is important to keep records of data, its ownership and processes performed is a candidate for a blockchain solution – especially industries that are today fairly manual and where regulatory compliance is required. So that includes everything from property ownership to supply-chains for manufactured goods to healthcare records, to ownership of digital rights for art, media and other content. Even legal processes and the business of democracy – i.e. voting.
In fact, the influential World Economic Forum think tank recently predicted that 10 per cent of the world’s global domestic product would be stored in blockchains by 2027. That represents many trillions of pounds of transactions.
In reality, what’s going to happen with blockchain in 2016?
There’s going to be a lot of progress for sure, but different industries will have different starting points. For some, it will be about education, while others will be focused on experimentation, and a few will bring some beta and 1.0 services to market.
In general, the financial services space – capital markets and payments in particular – are already quite knowledgeable about blockchains and some banks have been experimenting with the technology for a while now.
UBS is something of a poster child, having set up a blockchain lab in London, which is quite visible in demonstrating what it’s working on and where it’s thinking is headed. In 2016, we’ll see more experimentation both by individual banks and by consortium, such as the one formed by consulting firm R3, which at last count had 42 banks signed up. Of course, not all the experiments will be successful and one might expect to see some negative news published during the year taking knocks at the potential of blockchain. But some credible Proof of Concepts (PoCs) will emerge for sure.
Most other industries are a bit behind where financial services is, so I expect 2016 to be a year of education and very limited experimentation for many. The demand for education is one reason that The Block Chain Conference has been created – and will take place in San Francisco on 10 February.
So what will it take for companies to move from PoCs to enterprise deployments?
Like most other new technologies – such as big data processing or cloud computing – blockchain will need the backing of major IT vendors before it is deployed in any widespread way by companies, let alone for so-called mission-critical applications.
Even banks, which are well advanced in experiments, with several already engaged with blockchain technology startups, will want the reassurance that their investment in blockchain has support from the kind of trusted IT vendors that they have worked with for many years. As the saying goes, no one ever got fired for buying IBM. Fortunately, IBM is one IT vendor that has developed some capabilities with blockchain.
IBM aside, when are those major IT vendors going to get involved with blockchain?
It’s beginning to happen right now and will accelerate during 2016. To be honest, many big IT vendors have been caught on the back foot by the rapid rise in mindshare that blockchain has acquired, and a lot are now playing catch up so that they are at least as knowledgeable as their customers.
Many IT vendors – of all sizes – will need to figure out how blockchain fits in to their current products and offerings, and determine how to leverage the opportunities while keeping its disruptive potential under control.
For now, a number of the big management consultancies – the likes of Accenture, Deloitte and PwC – are providing a fair amount of guidance and hand holding to larger companies that are exploring blockchains and some niche consulting firms have sprung up to help with education and building of prototypes.
One might expect that by the end of 2016, a significant number of major IT vendors will have created units focused on blockchain and begun to engage with customers on how it fits in to the legacy IT they are currently running. A few might even ship some product to beta customers.
What are going to be some of the challenges to enterprise adoption that the major IT vendors could help overcome?
Probably lots of fairly boring but extremely important realities of deploying enterprise IT. That includes creating scalable offerings – likely delivered for many as cloud services – and ensuring that security infrastructure and policies are in place.
Integration is another area to be worked on, since blockchain platforms will need to link in to existing business systems, databases and networks in order to be useful.
And application development tools will be important so that business analysts, not coders, can build apps on top of blockchains. Also standards for application programming interfaces (APIs) that can be subscribed to in an on-demand model.
Where will blockchain tech be in five years time?
Fingers crossed, accepted and seen as a credible technology approach with some commercial successes to point to. Expect some alignment with technologies such as big data (since block chains will be big data repositories), cloud (since many blockchains will be cloud delivered) and API Management (since there needs to be a standard and easy way to leverage them).
Also expect industry pundits to be talking about blockchain’s shortcomings, and what might be coming next.
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