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Blockchain: hype vs reality
Blockchain technology presents a number of complex challenges that must be overcome before it can truly deliver on its promises
Industry experts believe blockchain is a technology that has the potential to affect the business of most IT professionals in the next five years. Analyst Gartner has forecast that by 2023, blockchain will support the global movement and tracking of $2tn of goods and services.
It is regarded by many industry watchers as a disrupting force in the financial world. A PwC global financial technology (fintech) survey found that 56% of respondents recognise the importance of blockchain. At the same time, however, 57% admit to being unsure about or unlikely to respond to this trend.
Start with the hash
Blockchain is effectively a shared ledger between a group of people – for example, a group of companies that work together to produce a service or product. What makes blockchain different is the fact that the history of the changes – past transactions, for example – are immutable.
Essentially, the historical entries become read-only and unchangeable. This is due to the fact that each blockchain entry relies on the hash – a computed value including part of a previous block as part of its hashing calculation for the current block. This means that if a previous block is somehow modified or corrupted, its hash value will change and therefore the values after that point become broken, making the tampering evident for all to see.
One example where blockchain technology can be used is where several companies come together to provide or consume services, usually under long-term contracts. It can be complex and cumbersome to manage contracts involving several individuals, when multiple documents are involved and everyone needs to agree on the same contract versions and details. Over time, changes will occur that also need to be managed and agreed on.
Managing contracts in blockchain, however, means that rather than physical bits of paper being passed around, it becomes possible to mathematically guarantee the contract documents are as intended and the appropriate (digital) sign-off is a part of the chain. That chain can be verified by any of the parties as required. This is a key part of the whole blockchain concept.
An early trial
In 2016, Barclays and Wave completed what they described as a “world first” by using blockchain technology to handle the documentation to approve a fund transaction, which was made through the Society for Worldwide Interbank Financial Telecommunication (Swift). The letter of credit transaction between Ornua (formerly the Irish Dairy Board) and Seychelles Trading Company used distributed ledger technology via the Wave platform to enable all parties involved to see the documents they needed and transmit them where required on a decentralised network. This removed some of the inefficiencies of traditional international trade and brought completion timescales down from weeks to a few hours. It is not hard to see how the use of blockchain could be extended to include many different types of information, eventually encompassing the general public.
For instance, an article by McKinsey estimates that using blockchain to sign up new retail banking customers has the potential to create up to $1bn of savings in operating costs globally and reduce regulatory fines by between $2bn and $3bn. “In addition, we expect blockchain solutions to reduce annual losses from fraud by $7bn to $9bn,” McKinsey stated.
However, setting up and managing blockchain is a complex process that requires skilled design. As Gartner notes, a distributed ledger requires the recording and replicating of data in a secure manner. This is a complex mechanism with significant computational load (called mining). As such, blockchain has rather large scalability issues. Verification of blocks can take several minutes, which makes blockchain inappropriate for real-time transactions.
Each blockchain consumer may need to verify an entire transaction history, which is very inefficient and requires a high computational workload. New platforms are being developed that explore alternative approaches to verifying the integrity of blockchain transactions. These include massively diverse public ledgers for verifying historic transactions.
Other ideas include having a random pool of machines that validate the blockchain and publicly announce the results of the validation, saving everyone repeating the same compute-intensive functions. The very nature of these random machines and frequency with which they are rotated means that discovering and trying to attack verification hosts should be extremely difficult.
All current blockchain systems have some limitations in terms of scaling. So, such techniques may not scale to the level needed for blockchain to be a viable replacement to existing payment processing networks. However, there is now growing interest in new distributed processor workload platforms, such as Golam, and the use of hardware-based acceleration, application-specific integrated circuits (Asics) and graphics processing units (GPUs), all of which aim to accelerate processing for blockchain.
Beyond business contracts
There are many uses for blockchain technology in finance and beyond, but currently most of these technologies, with the exception of cryptocurrencies, are aimed squarely at the business to business market (B2B).
For blockchain to move beyond small-scale trials and experimentation, the whole software and hardware infrastructure stack needs to scale to support larger and larger volumes of transactions.
In 2018, a KPMG paper looking at uses for blockchain described the challenges of integrating blockchain into existing, legacy processes. The paper warned that organisations need to be aware that their legacy systems may not be designed to interact with blockchain systems or capitalise on the advantages they offer.
“Comprehensive examination of interoperability and integration is essential,” the KPMG paper stated. “Given the immutability of transactions, it is essential that the proper mechanisms are in place to prevent incorrect data from being written onto the blockchain.”
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Distributed ledgers are not just limited to finance and smart contracts. Gartner explores how blockchain can tackle government inefficiencies.
Another area of concern is the privacy of financial transactions. According to PwC, the business benefits for many players, or even the industry, will not materialise if the “trust issue” is not addressed effectively. For PwC, the hurdles that lie ahead include understanding whether or not the public ledger can be hacked.
From a privacy perspective, if several different organisations are involved in a transaction that uses blockchain, not all group members should have access to the data held within the blockchain. However, they still need to verify the blockchain’s integrity. Such secrecy flies in the face of the classic blockchain ethos.
Any transactions that go through Bitcoin or other cryptocurrencies are recorded as part of the blockchain process. Information such as wallet transactions, IP address and other details are collected. Being able to trace all wallet transactions could allow any interested parties to infer not only spending patterns, but also socio-economic status and similar. It may not give away exactly what is being purchased, but this information can help build an overall picture of someone’s online spending habits.
Today, it is very much an exploration of what is possible. As with any technology, over time blockchain will become more refined and mature, and no doubt privacy capable and expandable as needed.