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A one-size-fits-all blockchain just won’t do

With manifold use cases and specific requirements for blockchains, businesses will have to choose the right variety rather than deploy a single ‘interoperable’ blockchain

There will certainly be some major developments for blockchain technology in the coming years. The basic idea of tamper-proof, distributed data structures with time-stamped and replicable transactions stored in chained and encrypted blocks will undoubtedly stand the test of time.

However, one blockchain alone will not solve every problem. The technology is also much more driven by business than by technology. The question, therefore, is if it will help solve real business problems, and if so, in which version. Clearly, blockchains are not a better solution for everything.

Since the blockchain became famous as the technological foundation for the cryptocurrency Bitcoin some years ago, plenty of other cryptocurrencies and implementations have evolved. One of the most famous at the moment is Ethereum, with its concept of so-called smart contracts. Because a blockchain is ideal for use cases characterised by manifold transactions relying on self-executing agreements, these are also one of the main drivers for its further development in areas such as finance, insurance, healthcare and the internet of things (IoT).

Bitcoin is pseudonymised, public and permission-free, but there are also numerous private and permissioned, let alone hybrid, forms, where participants need authorisation before getting access. The fundamental element of them all, however, is consensus – ‘mining’ in Bitcoin language – which means each copy of each node is identical to all the others.

Different types of blockchain deploy different mathematical consensus mechanisms to verify each transaction, thus maintaining the integrity of the ledger and creating an immutable as well as auditable record. Attempts to corrupt the blockchain fail, since manipulated entries will be discarded in the following consensus run – in theory at least.

The consensus model

The consensus model defines use cases and characteristics such as performance, etc. With Bitcoin, consensus is established through so-called proof-of-work hashing algorithms, without the need for intermediaries. That has the potential to cut clearing process costs in the finance industry, but has the disadvantage of consuming a high amount of energy. It is also slow and not very efficient, and there have been several security-related Bitcoin incidents.

A permissioned blockchain, on the other hand, seems to be more attractive for security reasons because the consensus works as a kind of unforgeable digital signature. It is also usually faster, but lacks the possibility of omitting intermediaries and does not work for many of the public use cases. There are other limitations and pitfalls too.

In the end, it is the question of the business use case. Does a certain type of blockchain help solve individual challenges a) better than before, b) that couldn’t be solved before, or c) that are completely new? Does it improve competitiveness by lowering costs? The type of ledger defines what can be done and how.

The right blockchain

If your ultimate goal is to achieve a good balance between business enablement and risk mitigation by blockchain, you need an understanding of both aspects. It would clearly be a win-win to lower the risk while accelerating the business.

With closed, permissioned blockchains, the rules for access rights to certain private information could be determined and controlled via smart contracts. These contracts could also store data about when the access rights expire and bring them to an end automatically. While blockchains today also mainly support secure information storage, they will develop to secure information processing too, opening up further possibilities for interesting use cases such as in information rights management (IRM) and life management platforms (LMPs).

Like other technologies, blockchains do not offer 100% security. It is important to choose an appropriate version, one that fits particular business and security demands. Between public and private blockchains there also exist various subtypes or so-called federated ledgers, controlled by several permissioned organisations instead of by just one. These “community” blockchains are typically more secure than private distributed ledgers and therefore highly suitable for the finance world, for example.

Companies can also use blockchain as a service models offered by the likes of Amazon, IBM and Microsoft. IBM, for instance, has created its own consensus protocol that is being used by several larger banks.

How to go about it

Start small by analysing the potential profitable use cases for your business. Observe the further development of blockchains. Invest in employee education to make staff understand the specific benefits and drawbacks of different blockchains. Develop a strategy and a roadmap. And reorganise your IT by decentralising it completely and moving IT capabilities into the business. Don’t just align IT – integrate it. Strive to participate in industry groups. And, probably most important of all, take time to experiment with different blockchains in overseeable projects.

Martin Kuppinger is founder and principal analyst at KuppingerCole.

This was last published in June 2016

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