Chances are you’ve been hearing about a technology called “blockchain” because it has received a lot of hype lately. As with any newer technology, lots of claims and notions are being floated around.
To help make sense of blockchain and what it might mean for your organization, we’ve put together a primer based on input from experts who are covering this area closely.
What is blockchain and where did it come from?
Blockchain is a loose term these days, and there are lots of short, punchy definitions, says Gilles Ubaghs, senior analyst, Financial Services Technology, at research firm Ovum.
“It’s a complex topic that is worth breaking down into detail, but technically is a means of maintaining a ledger of transactions across a network over time,” Ubaghs says. “To use a metaphor, each page in the ledger recording the transaction forms a block [and] that block/page has an impact on the next block/page” through the use of a cryptographic hashing.
When a block is completed, it creates a unique secure code, Ubaghs says. That code then ties into the next page/block, and subsequently has an impact on that block’s secure code. Any attempt to make an alteration to the ledger of transactions in any pre-existing block will have an impact on the cryptographic hash/secure code and be detectable. “Hence, it is tamper proof,” Ubaghs says.
The other aspect of blockchain that’s perhaps more critical, Ubaghs says, is the method of reaching consensus across the network. With Bitcoin—a digital payment system—blockchain operates on a “proof of work” consensus model, whereby “miner” nodes within the network offer processing power for these transactions.
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“They race to find the solution to a computation puzzle, which is verifiable by the rest of the network,” Ubaghs says. “Once a node/miner cracks the puzzle, this effectively closes off one block in the blockchain, and the network as a whole moves to the next block, with a record of those transactions now basically in stone and untamperable.”
Through this consensus model, there’s no need for one central authority to verify the transactions and ensure the accuracy of the ledger. “And that’s really the idea that has people excited,” Ubaghs says.
The concept of blockchain is not new; it goes back to old computational and even philosophical issues on how to ensure compliance without a centralized authority. The Bitcoin blockchain is just one version of the technology, Ubaghs says, and other forms are now emerging such as hyperledger, Ethereum and the R3 Consortium’s Corda protocol.
“It’s branching out and developing quite quickly,” Ubaghs says. “As the tech evolves, the terminology is evolving too away from just blockchain, to distributed ledger and even just ledger technologies.”
Does anybody understand how blockchain really works, and what’s driving the hype?
Clearly there’s a lot of confusion about blockchain. “Many—some might say most—of the people writing and talking about blockchain don’t understand the concept and the underlying technologies at a technical level,” says Martha Bennett, principal analyst at Forrester Research.
The confusion is understandable, because the technology is new and complicated, adds Fabio Chesini, research director at Gartner. “Blockchain is often described as a distributed general ledger, but even beyond its distributed nature, there’s a fundamental difference between a traditional general ledger and a blockchain distributed ledger,” Chesini says.
In a traditional general ledger, “all you need to do to know is the current balance of a given account is to go to the last movement,” Chesini says. “The blockchain is more complex.”
Because of the hype surrounding blockchain and in particular Bitcoin, people tend to see it as a simple distributed general ledger for exchanging a pseudo currency, Chesini says. “But the true power of blockchain lies in the ability to use it as a mechanism to transfer any asset and the underline value associated to it,” he says.
Some of the hype is driven by the competitive nature of the finance industry. “There’s a lot of FOMO—fear of missing out—around,” Bennett says. “When banks see competitors announce that they’ve done a deal with a blockchain start-up, or running blockchain [proofs of concept], many feel compelled to follow suit.”
There’s clearly a huge gap between hype and reality. “Very little has been proven in practice to date,” Bennett says. “To be clear, that’s not to say that I don’t believe in the disruptive potential of blockchain concepts and technology. We are indeed looking at taking distributed computing to a new level. It’s just that not everybody is prepared to admit that we’re at the ‘just barely learning to walk’ stage.”
Those who do understand blockchain today are developing innovative distributed applications and new platforms based on blockchain technology, Ubaghs says, including the ones he mentioned.
“But it’s also an overhyped and widely misunderstood term,” Ubaghs says. “The vast majority of the market is just getting to grips with what the technology is, and the ‘consultants’ are now emerging to help them.”
How about a simple example of how blockchain works?
“Let’s say that Alice sells products to Bob, and they agree to use U.S. dollars as the currency for all transactions,” Chesini says. “Alice uses a general ledger for accounting purposes, to track all her transactions with Bob. All she needs to do to determine the balance at a given point in time is to look at the latest closing balance in her general ledger.”
In a blockchain, however, the concept of the closing balance doesn’t exist. Determining the balance of a given account is a matter of going backward from the last block in the blockchain to the block containing the very first transaction between the two parties involved, Chesini says.
“So let’s say Alice decides to use a blockchain general ledger,” Chesini says. “If she wants to know the balance at a certain point in time, she’ll need to trace back through all the transactions she’s ever had with Bob.”
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The blockchain introduces entirely new characteristics to the traditional accounting system being used in any industry, Chesini says. “One important characteristic is the distributed nature of the ledger, which makes it resilient and distributes operational costs among the participants,” he says. Another key characteristic is provenance, which brings with it transparency and auditability.
Who’s taking the lead on developing blockchain, and what are the possible business applications?
Many different parties are taking on lead roles in blockchain development, depending on use case and motivation, Bennett says. “There’s no single body that drives development,” she says.
Blockchain isn’t just one technology, Ubaghs notes, and there are a few major players making waves. These include Ripple Labs, Data Assett Holdings and Ethereum, among others.
“Most of this initial development is happening with a focus on financial services and financial markets in particular,” with work being done by the NASDAQ and Australian Securities Exchange (ASX) as well as other organizations, Ubaghs says. “But the applications are veritably endless, with major potential in the Internet of Things.”
Any service that requires a centralized data connection can now be distributed, opening up the possibility for all sorts of new services, such as automated payments via smart goods, automatically negotiated smart contracts, etc.
The permanent verifiable nature of blockchain means all sorts of contractual, documentation and legal functions can be driven with the technology. “In theory, it even leads to the potential for full autonomous organizations to form and operate—corporate boards, and voting systems, etc.,” Ubaghs says.
Is blockchain going to change the world of internet transactions, and if so how?
In the immediate term, no. “Not for the average consumer in any case,” Ubaghs says. “The primary use case for blockchain technology in financial services is on backend infrastructure. What that means is payments will become cheaper, faster and eventually much more global. That will open up significant potential in terms of remittances, and cross-border commerce.”
If I’m a security professional, why should I care about blockchain?
For security professionals, the distributed nature of blockchain and its implications for the business model is a key aspect to consider about the technology, Chesini says.
“We are seeing lot of different consensus mechanisms being used by different metacoin platforms, mainly in trusted ecosystems, that bring lots of unknown scenarios that need to be fully assessed,” Chesini says. “Another key characteristic of blockchain is that you cannot easily decouple IT and business requirements, which makes holistic understanding of the problems that must be solved a key concern for security professionals.”
Blockchain offers significant security potential in terms of storing data, but there are still potentially weak points in terms of getting that data into or out of a blockchain, Ubaghs says. “It could be a very strong security solution, but it needs to be understood,” he says.
What does the future hold for blockchain?
Blockchain has the potential to have huge repercussions for a lot of business processes, Ubaghs says. “How exactly this will pan out, no one really knows yet,” he says. “However, it’s imperative that all organizations begin learning and understanding the technology now. The snake oil salesmen are coming out, and blockchains aren’t suitable for every situation. But in some situations the impact will be profound.”
The good news is most blockchain technologies are open source, “which means learning, experimenting and getting your hands dirty with the technology is pretty easy to do,” Ubaghs says. “However, with such hype in the space, there’s a real challenge in recruiting talent. Nurturing and developing that in-house now could be beneficial longer term.”
As for business applications of blockchain, overall there’s little for which blockchain hasn’t been proposed as a solution, Bennett says. “It’s too soon to tell which applications will actually prove practical for large-scale deployment,” she says.
Her main advice to IT executives: “Make sure the tech offering matches your use case, and look very carefully at the background of the teams involved in blockchain startups. There’s a lot of technology brilliance, but not always an understanding of enterprise requirements in terms of speed, security, scalability and compliance.”
Violino is a freelance writer. He can be reached at firstname.lastname@example.org.
This story, "Blockchain: You’ve got questions; we’ve got answers" was originally published by Network World.