Blockchain, which is usually referenced as the technological backbone of bitcoin, is now stepping into the spotlight in its own right as organizations start to explore how they can transform some of their business operations to build institutionalized trust.
In a recent report, Deloitte said that blockchain has the potential to re-shape businesses, governments and economies. Like the internet reinvented communication, Deloitte believes that blockchain could have a similar impact on transactions, contracts and trust.
So what is blockchain?
Blockchain is a transparent digital ledger of transactions, agreements and contracts – or any other data that has to be independently verified and recorded. But instead of the ledger being housed in one place, it is spread across a global computer network, where anyone can be updated by anyone. Once updated it cannot be altered or tampered with in any way.
Digital records are bound together in ‘blocks’ and cryptographically and chronologically bonded via complex mathematical algorithms into a ‘chain’. Given one block, all the information in the previous blocks can be followed right back to the so called genesis block – the first block in the chain.
The beauty of blockchain is there is no single point of failure. Because there are multiple copies of the blockchain on a distributed network it makes for a robust solution against connectivity issues or hardware crashes, for example.
Blockchain is also very secure. Once data goes through the encryption process, known as ‘hashing’, there is no way of converting it back to original data. Its advocates claim this underscores confidence in data integrity and reduces fraud risk. In addition, all transactions carry a digital signature for authentication.
How can blockchain change business?
Blockchain is undoubtedly a powerful technology set to change the way in which transactions are specified, shared, managed and carried out. The capabilities of traditional systems have hobbled innovation in this area. Blockchain will change the perimeters for what services can be automated in the future.
As Deloitte points out, blockchain will become a “platform for value in all forms to be managed, and for consumers, organizations and regulators alike to connect and interact securely across a rapidly accelerating range of use-cases”. These include payments, compliance ledger and post trading processes. Blockchain will also help connect the Internet of Things (IoT), allowing devices to quite literally “independently own, negotiate, purchase and even sell products”.
But blockchain comes with its challenges. Speaking at the Forrester Digital Transformation Summit Europe, Principal Analyst Martha Bennett said that it may be better to refer to blockchain in its description as a database as opposed to a ledger. “My main message out of all of this is if you are discussing blockchain make sure you are on the same page, because blockchain is like cloud or big data, it means what you want it to mean”.
Bennett believes that blockchain is still in its infancy and is five to ten years away from mass adoption. She also pointed out that there has to be agreed common standards and processes before blockchain can take off.
Finance has taken up the block chain gauntlet
Financial institutions have been quick to grasp blockchain with both hands. They see it as potentially "disruptive" which could reduce the roles of banks and other intermediaries, changing the way transactions are cleared and settled.
Financial groups are already working on standards. Microsoft, for example, recently partnered with the R3 Consortium, made up of over 50 financial institutions, to work on distributed ledger technology.
“With intelligent, cloud-based technology, R3 and member banks will experiment and learn faster, accelerating distributed ledger technology deployment,” said Peggy Johnson, executive vice president of global business development at Microsoft. “What’s more, our collaboration brings to light tremendous opportunities to rethink business processes and transform entire industries.”
The Open Ledger Project instigated by the Linux Foundation and backed by industry heavyweights including IBM, Cisco, Intel, Fujitsu, Hitachi, NTT Data, NEC, Wells Fargo, J.P. Morgan and Deutsche Börse Group, is also working to advance blockchain digital technology for recording and verifying transactions.
“As a broad, open initiative inclusive of many different blockchain experts, the Hyperledger Project will advance the open blockchain standard for uses across many industries,” explained Jerry Cuomo, vice president blockchain, IBM. “By focusing on an open platform, there’s no limit to the types of applications and frameworks that will one day be built on top of it.”
Some have already taken the leap and are experimenting with blockchain. The Royal Bank of Canada, for example, is working on a proof of concept for distributed-ledger based remittances in partnership with startup Ripple. It is also looking at a loyalty platform where the bank can engage with customers in real time through a blockchain to help them better understand the points and rewards they are accruing by using RBC products and services.
A linked future
Blockchain is a very new technology and whether it will fulfill all its promises still remains to be seen. But it does mean that institutions of trust will have to “transform themselves if they hope to continue participating, substantively and efficiently, in blockchain’s brave new world”, according to Deloitte.
Jan has been writing about technology for over 22 years for magazines and web sites, including ComputerActive, IQ magazine and Signum. She has been a business correspondent on ComputerWorld in Sydney and covered the channel for Ziff-Davis in New York.