Block Chain

Block Chain

The blockchain is an undeniably ingenious invention – the brainchild of a person or group of people known by the pseudonym, Satoshi Nakamoto. By allowing digital information to be distributed but not copied, blockchain technology created the backbone of a new type of internet. Originally devised for the digital currency, Bitcoin blockchain, (Buy Bitcoin) the tech community has now found other potential uses for the technology. 

Fault-Tolerant

The blockchain is a distributed, decentralised system that maintains a shared state. While consensus algorithms are designed to make it possible for the network to agree on the state, there is the possibility that agreement does not occur. Fault tolerance is an important aspect of blockchain technology.

The blockchain is inefficient and redundant, and that is by design. That’s what gives us immutability. And another thing it gives us is an extreme level of fault tolerance.

At its heart, blockchain runs on a peer-to-peer network architecture in which every node is considered equal to every other node.

And unlike traditional client-server models, every node acts as both a client and a server.

And so, we continue this redundancy down at the network level, where we’re asking all these nodes to perform the same work as all these other nodes.

Like any peer-to-peer system, we have an extremely high degree of fault tolerance. In fact, if we have two or more nodes online in a blockchain system, we still have a working blockchain.

And when you think about that amazing fact given the scale of major public blockchains, you can see the inbuilt fault tolerance.

Highly Available

Blockchain technologies such as Ethereum are designed to eliminate the need to have a third party (lawyers, banks and other services) involved in contracts and make trustless transactions verified automatically. The foundation of blockchain technology is that it is built in a way that deters denial of service attacks and other service abuses such as spam on a network. It does this by requiring an additional layer of work from the service requester, which usually means processing time by a computer.

As financial institutions are high value targets for hackers, the implementation and development of innovative solutions are crucial. As the credibility of the cryptocurrency field grows, it has a direct correlation to Fintech and enhances it by combining top cyber solutions with innovative Fintech applications. While blockchain technology is resistant to DDoS and other service abuses by its distributed nature, the companies that utilize these technologies still have weak spots that can be exploited.

We already pointed out these weak spots in cryptocurrency exchanges, crypto wallets and ICOs. These vulnerabilities are always in areas that are centralized and not based on distributed ledgers.

Recoverable

As blockchain becomes increasingly popular, enterprises across industries are wondering whether this technology can benefit them, and how. Brijesh Balakrishnan, Associate Vice President, and Head of Delivery for High Tech Consumer Electronics and Blockchain, Infosys, takes time of his schedule to sit down with Alex, our host for this podcast and explains how blockchain has progressed over the last decade, points out some of the industries that have rapidly adopted this technology and why, and how enterprises need to approach this rapidly evolving technology.

Listen to this podcast to learn how blockchain is likely to develop in the near future and the challenges it could encounter to its widespread applicability. Brijesh also deep dives into the Distributed Ledger Technology (DLT) choices available in the market and makes a guess on who will emerge a winner. He also comments on how Infosys has been engaging with blockchain and investing in it to develop high quality proof of concepts and accelerators for its clients.

Consistent

Blockchain, the concept from Bitcoin created by Satoshi Nakamoto, has the potential to decentralise traditionally centralised systems. Blockchain is a distributed ledger for recording information, stored by many nodes without a central organization through distributed systems and cryptography. The consensus algorithm is a protocol that guarantees the consistency of all data in a blockchain system. It is a key for building a blockchain system and an important part that affects the performance of the blockchain system. In this paper, we firstly compare the usage scenarios of different consensus algorithms, their advantages and disadvantages. After that, we present a new consensus algorithm in permissioned blockchain based on consistent hashing. For blockchain system construction, we propose a new design of the hash ring. The pseudo-randomness of the hash operation is used to ensure the randomness of the electoral leadership node in the blockchain system. It avoids the security risk of the fixed leadership node model. Our algorithm is applicable to blockchain systems containing Byzantine nodes and has a high throughput, low delay and many other advantages. Its communication complexity is O(n), significantly better than that of the practical Byzantine fault tolerance algorithm whose communication complexity is O(n2).

Scalable

Bitcoin, in its current form, can handle around 7 transactions per second (TPS). Ethereum, which businesses are often more interested in as it can run smart contracts, can manage about 20. These are unacceptably low throughputs for most business applications. If you’ve just started researching blockchain, you’ll immediately see there is a “TPS war” going on between competing projects, and many of them claim to be much faster. If Ripple can handle thousands of transactions (and it can, indeed), shouldn’t everyone switch to XRP?

No.

Because of Kevin.

Let me explain.

Kevin is in the business of moving houses. He owns a small but reputable moving company, and he’s flooded with clients. If you are about to move and you text Kevin, you will find yourself in a “pick two” situation: a service can be fast and affordable, but poor; fast and great, but expensive; or great and affordable, but slow. You can never have all three, i.e., fast, great and affordable service. People think it is a joke, but it has been a subject of academic study since the 1950s under the fancy name “Project Management Triangle.”

Blockchains suffer from a very similar problem, called The Scalability Trilemma. It is essential to understand how constraints and trade-offs work in this space, before jumping on a train which looks shiny, fast and comfortable, but goes nowhere.

The Scalability Trilemma

A blockchain can only at most have two of three properties: fast, secure and decentralized. No one ever succeeded in creating a fast, secure and decentralized blockchain, although we are getting close (more on this later).

Let me add two important points before we dig deeper. First, I am not going to talk about the differences between public / private and permissionless / permissioned blockchains. Understanding them is crucial, and they will be part of an upcoming article, but we don’t need to know much about any of these to figure out the trilemma. Second, if you are a developer, you will find this way oversimplified. It’s intended.

So, how does an “ideal blockchain” looks like?

It should be fast, or rather scalable, capable of handling thousands of transactions per second.

It should be secure. Not free of bugs — those are inevitably present — but resistant to threats such as the 51% attack (one actor controlling more than half of the network), Sybil attacks (one actor forging and using multiple identities) or denial-of-service attacks.

An ideal blockchain is decentralized. It ensures, among other benefits, that no single actor or a group of actors can hijack the chain, censor it, or introduce changes in governance through backroom deals. This can be important in business applications where the participants often don’t trust each other. In the case of public and permissionless blockchains, it allows anyone to join and participate in the network.

Satisfying all three at the same time is difficult.

We will never be able to build a blockchain which is faster than a traditional database running on a single server. The question is, how much speed are we willing to sacrifice.

If you want your blockchain to be as resilient to attacks as technologically possible, you need to choose Proof of Work as the consensus mechanism. In a Proof of Work system, nodes have to spend a significant amount of computing power (electricity) before they can add a block to the chain. This is a time-consuming process, so PoW chains like Bitcoin will not ever be able to compete in speed. This is not an issue; this is by design, as Bitcoin de-prioritizes network throughput.

Other consensus mechanisms (Proof of Stake, Delegated Proof of Stake, Proof of Authority, et cetera.) are significantly faster than PoW. You can’t run meaningful operations on a 7 transactions-per-second blockchain like Bitcoin, but the difference between 1000 and 15,000 TPS is irrelevant for most business applications. 1000 TPS is probably fast enough.

Non-PoW blockchains have to make a trade-off between security and decentralization and, unsurprisingly, they tend to sacrifice decentralization — no one wants to build on a vulnerable blockchain, after all. There is no single perfect solution, and individual preferences, as well as the use case, matter a lot. It’s easier to understand it through examples.

An extreme example of a fast and secure but centralized blockchain is Ripple. The validators (nodes which can add now blocks) are pre-selected by the Ripple Foundation. Participants in the network have to trust these validators, which kind of defeats the whole purpose of using a blockchain. Have we just traded unaccountable private banks for… another unaccountable private entity? The blockchain community generally dislikes Ripple, and I am sure you can see why. My unpopular opinion: Ripple is a fantastic technology, the company is incredibly efficient in business development, and I respect that. But it is a BINO. Blockchain In Name Only.

EOS is another controversial project heavily prioritizing security over decentralization. The EOS blockchain is maintained by 21 “block producers”: only they can add new blocks, and get a monetary reward. It looks very centralized compared to Bitcoin (more than 10000 nodes) or Ethereum (more than 12000 nodes), but the problem is not just technical, it’s political. First, it is widely reported that 17 of the 21 block producers are controlled by one entity, Huobi, through backroom deals. Second, EOS has a governance mechanism to reverse transactions, something they just did recently. Both go against the core philosophy of blockchain, and I would never recommend anyone to build applications on EOS. It doesn’t matter how good the technology is if the incentives in the network are entirely misaligned.

Stellar, in contrast, seems to be doing the right trade-offs. It lets *anyone* run a node; you don’t need to be “selected” by some unaccountable central entity. The problem with Stellar is the lack of incentives, as node operators don’t get a monetary reward. This design choice helps keep the transaction fees very low, but it is a double-edged sword.

There’s no free lunch. Low (or zero) transaction fee leads to less decentralization.

If people are not incentivized to participate in the network, groups and organizations with spare cash to spend will inevitably control most of the nodes. That said, Stellar is mostly doing it right.

The project trying the hardest to solve the trilemma is Ethereum (it was Vitalik who coined the term “scalability trilemma” in the first place). Ethereum is switching from Proof of Work to Proof of Stake sometime in the next 12–18 months, and this by itself will result in a higher TPS without sacrificing much of the security and decentralization it currently enjoys. Other developments like sharding will further increase the network’s throughput.

Coming in Part II

All the trade-offs and developments we discussed so far happen on the protocol level. It’s about the core logic. However, this is not the only way to scale a blockchain. Layer 2 solutions, which we will discuss in Part II, don’t increase the throughput, rather move some of the transactions (data) off the chain.

Imagine you want to store the results of a chess competition on the Ethereum blockchain (it’s a bad example as you should use a simple database, but bear with me). Every single move made by the players can be a transaction by itself, but you don’t necessarily want to store each one of them on the main blockchain. Since the players know the rules and generally trust each other, it’s enough if the individual moves are registered in transactions between the two of them. You can use the Ethereum chain to record the state of the board after every 5–10 moves or so, hitting a sweet spot between the amount of data stored and the chain being the representation of the truth.

Predictable Performance

contracts, transactions, and the records of them are among the defining structures in our economic, legal, and political systems. They protect assets and set organizational boundaries. They establish and verify identities and chronicle events. They govern interactions among nations, organizations, communities, and individuals. They guide managerial and social action. And yet these critical tools and the bureaucracies formed to manage them have not kept up with the economy’s digital transformation. They’re like a rush-hour gridlock trapping a Formula 1 race car. In a digital world, the way we regulate and maintain administrative control has to change.

Blockchain promises to solve this problem. The technology at the heart of bitcoin and other virtual currencies, blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically.

With blockchain, we can imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision. In this world every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared. Intermediaries like lawyers, brokers, and bankers might no longer be necessary. Individuals, organizations, machines, and algorithms would freely transact and interact with one another with little friction. This is the immense potential of blockchain.

Indeed, virtually everyone has heard the claim that blockchain will revolutionize business and redefine companies and economies. Although we share the enthusiasm for its potential, we worry about the hype. It’s not just security issues (such as the 2014 collapse of one bitcoin exchange and the more recent hacks of others) that concern us. Our experience studying technological innovation tells us that if there’s to be a blockchain revolution, many barriers—technological, governance, organizational, and even societal—will have to fall. It would be a mistake to rush headlong into blockchain innovation without understanding how it is likely to take hold.

True blockchain-led transformation of business and government, we believe, is still many years away. That’s because blockchain is not a “disruptive” technology, which can attack a traditional business model with a lower-cost solution and overtake incumbent firms quickly. Blockchain is a foundational technology: It has the potential to create new foundations for our economic and social systems. But while the impact will be enormous, it will take decades for blockchain to seep into our economic and social infrastructure. The process of adoption will be gradual and steady, not sudden, as waves of technological and institutional change gain momentum. That insight and its strategic implications are what we’ll explore in this article.

Patterns of Technology Adoption

Before jumping into blockchain strategy and investment, let’s reflect on what we know about technology adoption and, in particular, the transformation process typical of other foundational technologies. One of the most relevant examples is distributed computer networking technology, seen in the adoption of TCP/IP (transmission control protocol/internet protocol), which laid the groundwork for the development of the internet.

Introduced in 1972, TCP/IP first gained traction in a single-use case: as the basis for e-mail among the researchers on ARPAnet, the U.S. Department of Defense precursor to the commercial internet. Before TCP/IP, telecommunications architecture was based on “circuit switching,” in which connections between two parties or machines had to be preestablished and sustained throughout an exchange. To ensure that any two nodes could communicate, telecom service providers and equipment manufacturers had invested billions in building dedicated lines.

TCP/IP turned that model on its head. The new protocol transmitted information by digitizing it and breaking it up into very small packets, each including address information. Once released into the network, the packets could take any route to the recipient. Smart sending and receiving nodes at the network’s edges could disassemble and reassemble the packets and interpret the encoded data. There was no need for dedicated private lines or massive infrastructure. TCP/IP created an open, shared public network without any central authority or party responsible for its maintenance and improvement.

Traditional telecommunications and computing sectors looked on TCP/IP with skepticism. Few imagined that robust data, messaging, voice, and video connections could be established on the new architecture or that the associated system could be secure and scale up. But during the late 1980s and 1990s, a growing number of firms, such as Sun, NeXT, Hewlett-Packard, and Silicon Graphics, used TCP/IP, in part to create localized private networks within organizations. To do so, they developed building blocks and tools that broadened its use beyond e-mail, gradually replacing more-traditional local network technologies and standards. As organizations adopted these building blocks and tools, they saw dramatic gains in productivity.

TCP/IP burst into broad public use with the advent of the World Wide Web in the mid-1990s. New technology companies quickly emerged to provide the “plumbing”—the hardware, software, and services needed to connect to the now-public network and exchange information. Netscape commercialized browsers, web servers, and other tools and components that aided the development and adoption of internet services and applications. Sun drove the development of Java, the application-programming language. As information on the web grew exponentially, Infoseek, Excite, AltaVista, and Yahoo were born to guide users around it.

Once this basic infrastructure gained critical mass, a new generation of companies took advantage of low-cost connectivity by creating internet services that were compelling substitutes for existing businesses. CNET moved news online. Amazon offered more books for sale than any bookshop. Priceline and Expedia made it easier to buy airline tickets and brought unprecedented transparency to the process. The ability of these newcomers to get extensive reach at relatively low cost put significant pressure on traditional businesses like newspapers and brick-and-mortar retailers.

Relying on broad internet connectivity, the next wave of companies created novel, transformative applications that fundamentally changed the way businesses created and captured value. These companies were built on a new peer-to-peer architecture and generated value by coordinating distributed networks of users. Think of how eBay changed online retail through auctions, Napster changed the music industry, Skype changed telecommunications, and Google, which exploited user-generated links to provide more relevant results, changed web search.

Companies are already using blockchain to track items through complex supply chains.

Ultimately, it took more than 30 years for TCP/IP to move through all the phases—single use, localized use, substitution, and transformation—and reshape the economy. Today more than half the world’s most valuable public companies have internet-driven, platform-based business models. The very foundations of our economy have changed. Physical scale and unique intellectual property no longer confer unbeatable advantages; increasingly, the economic leaders are enterprises that act as “keystones,” proactively organizing, influencing, and coordinating widespread networks of communities, users, and organizations.

The New Architecture

Blockchain—a peer-to-peer network that sits on top of the internet—was introduced in October 2008 as part of a proposal for bitcoin, a virtual currency system that eschewed a central authority for issuing currency, transferring ownership, and confirming transactions. Bitcoin is the first application of blockchain technology.

The parallels between blockchain and TCP/IP are clear. Just as e-mail enabled bilateral messaging, bitcoin enables bilateral financial transactions. The development and maintenance of blockchain is open, distributed, and shared—just like TCP/IP’s. A team of volunteers around the world maintains the core software. And just like e-mail, bitcoin first caught on with an enthusiastic but relatively small community.

TCP/IP unlocked new economic value by dramatically lowering the cost of connections. Similarly, blockchain could dramatically reduce the cost of transactions. It has the potential to become the system of record for all transactions. If that happens, the economy will once again undergo a radical shift, as new, blockchain-based sources of influence and control emerge.

Consider how business works now. Keeping ongoing records of transactions is a core function of any business. Those records track past actions and performance and guide planning for the future. They provide a view not only of how the organization works internally but also of the organization’s outside relationships. Every organization keeps its own records, and they’re private. Many organizations have no master ledger of all their activities; instead records are distributed across internal units and functions. The problem is, reconciling transactions across individual and private ledgers takes a lot of time and is prone to error.

For example, a typical stock transaction can be executed within microseconds, often without human intervention. However, the settlement—the ownership transfer of the stock—can take as long as a week. That’s because the parties have no access to each other’s ledgers and can’t automatically verify that the assets are in fact owned and can be transferred. Instead a series of intermediaries act as guarantors of assets as the record of the transaction traverses organizations and the ledgers are individually updated.

In a blockchain system, the ledger is replicated in a large number of identical databases, each hosted and maintained by an interested party. When changes are entered in one copy, all the other copies are simultaneously updated. So as transactions occur, records of the value and assets exchanged are permanently entered in all ledgers. There is no need for third-party intermediaries to verify or transfer ownership. If a stock transaction took place on a blockchain-based system, it would be settled within seconds, securely and verifiably. (The infamous hacks that have hit bitcoin exchanges exposed weaknesses not in the blockchain itself but in separate systems linked to parties using the blockchain.)

A Framework for Blockchain Adoption

If bitcoin is like early e-mail, is blockchain decades from reaching its full potential? In our view the answer is a qualified yes. We can’t predict exactly how many years the transformation will take, but we can guess which kinds of applications will gain traction first and how blockchain’s broad acceptance will eventually come about.

In our analysis, history suggests that two dimensions affect how a foundational technology and its business use cases evolve. The first is novelty—the degree to which an application is new to the world. The more novel it is, the more effort will be required to ensure that users understand what problems it solves. The second dimension is complexity, represented by the level of ecosystem coordination involved—the number and diversity of parties that need to work together to produce value with the technology. For example, a social network with just one member is of little use; a social network is worthwhile only when many of your own connections have signed on to it. Other users of the application must be brought on board to generate value for all participants. The same will be true for many blockchain applications. And, as the scale and impact of those applications increase, their adoption will require significant institutional change.

We’ve developed a framework that maps innovations against these two contextual dimensions, dividing them into quadrants. (See the exhibit “How Foundational Technologies Take Hold.”) Each quadrant represents a stage of technology development. Identifying which one a blockchain innovation falls into will help executives understand the types of challenges it presents, the level of collaboration and consensus it needs, and the legislative and regulatory efforts it will require. The map will also suggest what kind of processes and infrastructure must be established to facilitate the innovation’s adoption. Managers can use it to assess the state of blockchain development in any industry, as well as to evaluate strategic investments in their own blockchain capabilities.

Single use.

In the first quadrant are low-novelty and low-coordination applications that create better, less costly, highly focused solutions. E-mail, a cheap alternative to phone calls, faxes, and snail mail, was a single-use application for TCP/IP (even though its value rose with the number of users). Bitcoin, too, falls into this quadrant. Even in its early days, bitcoin offered immediate value to the few people who used it simply as an alternative payment method. (You can think of it as a complex e-mail that transfers not just information but also actual value.) At the end of 2016 the value of bitcoin transactions was expected to hit $92 billion. That’s still a rounding error compared with the $411 trillion in total global payments, but bitcoin is growing fast and increasingly important in contexts such as instant payments and foreign currency and asset trading, where the present financial system has limitations.

Localization.

The second quadrant comprises innovations that are relatively high in novelty but need only a limited number of users to create immediate value, so it’s still relatively easy to promote their adoption. If blockchain follows the path network technologies took in business, we can expect blockchain innovations to build on single-use applications to create local private networks on which multiple organizations are connected through a distributed ledger.

Much of the initial private blockchain-based development is taking place in the financial services sector, often within small networks of firms, so the coordination requirements are relatively modest. Nasdaq is working with Chain.com, one of many blockchain infrastructure providers, to offer technology for processing and validating financial transactions. Bank of America, JPMorgan, the New York Stock Exchange, Fidelity Investments, and Standard Chartered are testing blockchain technology as a replacement for paper-based and manual transaction processing in such areas as trade finance, foreign exchange, cross-border settlement, and securities settlement. The Bank of Canada is testing a digital currency called CAD-coin for interbank transfers. We anticipate a proliferation of private blockchains that serve specific purposes for various industries.

Substitution.

The third quadrant contains applications that are relatively low in novelty because they build on existing single-use and localized applications, but are high in coordination needs because they involve broader and increasingly public uses. These innovations aim to replace entire ways of doing business. They face high barriers to adoption, however; not only do they require more coordination but the processes they hope to replace may be full-blown and deeply embedded within organizations and institutions. Examples of substitutes include cryptocurrencies—new, fully formed currency systems that have grown out of the simple bitcoin payment technology. The critical difference is that a cryptocurrency requires every party that does monetary transactions to adopt it, challenging governments and institutions that have long handled and overseen such transactions. Consumers also have to change their behavior and understand how to implement the new functional capability of the cryptocurrency.

A recent experiment at MIT highlights the challenges ahead for digital currency systems. In 2014 the MIT Bitcoin Club provided each of MIT’s 4,494 undergraduates with $100 in bitcoin. Interestingly, 30% of the students did not even sign up for the free money, and 20% of the sign-ups converted the bitcoin to cash within a few weeks. Even the technically savvy had a tough time understanding how or where to use bitcoin.

One of the most ambitious substitute blockchain applications is Stellar, a nonprofit that aims to bring affordable financial services, including banking, micropayments, and remittances, to people who’ve never had access to them. Stellar offers its own virtual currency, lumens, and also allows users to retain on its system a range of assets, including other currencies, telephone minutes, and data credits. Stellar initially focused on Africa, particularly Nigeria, the largest economy there. It has seen significant adoption among its target population and proved its cost-effectiveness. But its future is by no means certain, because the ecosystem coordination challenges are high. Although grassroots adoption has demonstrated the viability of Stellar, to become a banking standard, it will need to influence government policy and persuade central banks and large organizations to use it. That could take years of concerted effort.

Transformation.

Into the last quadrant fall completely novel applications that, if successful, could change the very nature of economic, social, and political systems. They involve coordinating the activity of many actors and gaining institutional agreement on standards and processes. Their adoption will require major social, legal, and political change.

“Smart contracts” may be the most transformative blockchain application at the moment. These automate payments and the transfer of currency or other assets as negotiated conditions are met. For example, a smart contract might send a payment to a supplier as soon as a shipment is delivered. A firm could signal via blockchain that a particular good has been received—or the product could have GPS functionality, which would automatically log a location update that, in turn, triggered a payment. We’ve already seen a few early experiments with such self-executing contracts in the areas of venture funding, banking, and digital rights management.

The implications are fascinating. Firms are built on contracts, from incorporation to buyer-supplier relationships to employee relations. If contracts are automated, then what will happen to traditional firm structures, processes, and intermediaries like lawyers and accountants? And what about managers? Their roles would all radically change. Before we get too excited here, though, let’s remember that we are decades away from the widespread adoption of smart contracts. They cannot be effective, for instance, without institutional buy-in. A tremendous degree of coordination and clarity on how smart contracts are designed, verified, implemented, and enforced will be required. We believe the institutions responsible for those daunting tasks will take a long time to evolve. And the technology challenges—especially security—are daunting.

Guiding Your Approach to Blockchain Investment

How should executives think about blockchain for their own organizations? Our framework can help companies identify the right opportunities.

For most, the easiest place to start is single-use applications, which minimize risk because they aren’t new and involve little coordination with third parties. One strategy is to add bitcoin as a payment mechanism. The infrastructure and market for bitcoin are already well developed, and adopting the virtual currency will force a variety of functions, including IT, finance, accounting, sales, and marketing, to build blockchain capabilities. Another low-risk approach is to use blockchain internally as a database for applications like managing physical and digital assets, recording internal transactions, and verifying identities. This may be an especially useful solution for companies struggling to reconcile multiple internal databases. Testing out single-use applications will help organizations develop the skills they need for more-advanced applications. And thanks to the emergence of cloud-based blockchain services from both start-ups and large platforms like Amazon and Microsoft, experimentation is getting easier all the time.

Localized applications are a natural next step for companies. We’re seeing a lot of investment in private blockchain networks right now, and the projects involved seem poised for real short-term impact. Financial services companies, for example, are finding that the private blockchain networks they’ve set up with a limited number of trusted counterparties can significantly reduce transaction costs.

Organizations can also tackle specific problems in transactions across boundaries with localized applications. Companies are already using blockchain to track items through complex supply chains, for instance. This is happening in the diamond industry, where gems are being traced from mines to consumers. The technology for such experiments is now available off-the-shelf.

Developing substitute applications requires careful planning, since existing solutions may be difficult to dislodge. One way to go may be to focus on replacements that won’t require end users to change their behavior much but present alternatives to expensive or unattractive solutions. To get traction, substitutes must deliver functionality as good as a traditional solution’s and must be easy for the ecosystem to absorb and adopt. First Data’s foray into blockchain-based gift cards is a good example of a well-considered substitute. Retailers that offer them to consumers can dramatically lower costs per transaction and enhance security by using blockchain to track the flows of currency within accounts—without relying on external payment processors. These new gift cards even allow transfers of balances and transaction capability between merchants via the common ledger.

Blockchain could slash the cost of transactions and reshape the economy.

Transformative applications are still far away. But it makes sense to evaluate their possibilities now and invest in developing technology that can enable them. They will be most powerful when tied to a new business model in which the logic of value creation and capture departs from existing approaches. Such business models are hard to adopt but can unlock future growth for companies.

Consider how law firms will have to change to make smart contracts viable. They’ll need to develop new expertise in software and blockchain programming. They’ll probably also have to rethink their hourly payment model and entertain the idea of charging transaction or hosting fees for contracts, to name just two possible approaches. Whatever tack they take, executives must be sure they understand and have tested the business model implications before making any switch.

Transformative scenarios will take off last, but they will also deliver enormous value. Two areas where they could have a profound impact: large-scale public identity systems for such functions as passport control, and algorithm-driven decision making in the prevention of money laundering and in complex financial transactions that involve many parties. We expect these applications won’t reach broad adoption and critical mass for at least another decade and probably more.

Transformative applications will also give rise to new platform-level players that will coordinate and govern the new ecosystems. These will be the Googles and Facebooks of the next generation. It will require patience to realize such opportunities. Though it may be premature to start making significant investments in them now, developing the required foundations for them—tools and standards—is still worthwhile.

Secure

Proponents of the distributed ledger technology known as blockchain consider it to be one of the best ways to secure transactions. I don’t know about you, but hearing that anything is the “best” immediately makes me skeptical. How exactly does blockchain provide more security than traditional transaction processes? Let’s take a look.

Security by the blocks

A blockchain, as the name implies, is a chain of digital “blocks” that contain records of transactions. Each block is connected to all the blocks before and after it. This makes it difficult to tamper with a single record because a hacker would need to change the block containing that record as well as those linked to it to avoid detection. This alone might not seem like much of a deterrence, but blockchain has some other inherent characteristics that provide additional means of security.

The records on a blockchain are secured through cryptography. Network participants have their own private keys that are assigned to the transactions they make and act as a personal digital signature. If a record is altered, the signature will become invalid and the peer network will know right away that something has happened. Early notification is crucial to preventing further damage.

Unfortunately for those ambitious hackers, blockchains are decentralized and distributed across peer-to-peer networks that are continually updated and kept in sync. Because they aren’t contained in a central location, blockchains don’t have a single point of failure and cannot be changed from a single computer. It would require massive amounts of computing power to access every instance (or at least a 51 percent majority) of a certain blockchain and alter them all at the same time. There has been some debate about whether this means smaller blockchain networks could be vulnerable to attack, but a verdict hasn’t been reached. In any case, the bigger your network is, the more tamper-resistant your blockchain will be.

At a glance, blockchains have some desirable features that would help to secure your transaction data. However, there are other conditions and requirements to consider when you want to use a blockchain for business.

All blockchains are not created equal

It’s important to be aware of this fact when evaluating whether the technology you’ve chosen will have the security you require. Today, there are two main types of blockchain, public and private, with a number of variations. Public and private blockchains differ in a couple of key ways that can affect the level of security they provide.

The most obvious difference is that public blockchains use computers connected to the public internet to validate transactions and bundle them into blocks to add to the ledger. Any computer connected to the internet can join the party. Private blockchains, on the other hand, typically only permit known organizations to join. Together, they form a private, members-only “business network.” This difference has significant implications in terms of where the (potentially confidential) information moving through the network is stored and who has access to it. Just from that, you can probably see how a public blockchain might not be right for enterprise. Another important and related difference is that public blockchains are typically designed around the principle of anonymity, whereas private blockchains use identity to confirm membership and access privileges, and so the participants in the network know exactly who they are dealing with.

The other main way public and private blockchains differ is how transactions are verified. Basically, for a transaction to be added to a blockchain, network participants must agree that it is the one and only version of the truth. That is done through consensus, which means agreement. Bitcoin is probably the most well-known example of a public blockchain and it achieves consensus through “mining.” In Bitcoin mining, computers on the network (or ‘miners’) try to solve a complex cryptographic problem to create a proof of work. The drawback is that this requires an enormous amount of computational power, especially for large-scale public blockchains.

Alternatively, a private blockchain consists of a permissioned network in which consensus can be achieved through a process called “selective endorsement,” where known users verify the transactions. The advantage of this for businesses is that only participants with the appropriate access and permissions can maintain the transaction ledger. There are still a few issues with this method, including threats from insiders, but many of them can be solved with a highly secure infrastructure.

A blockchain network is only as secure as its infrastructure

When establishing a private blockchain, you must decide the best platform for deployment. Even though blockchain has inherent properties that provide security, known vulnerabilities in your infrastructure can be manipulated by those with ill intent. Ideally, you should have an infrastructure with integrated security that can:

Prevent anyone — even root users and administrators — from accessing sensitive information

Deny illicit attempts to change data or applications within the network.

Carefully guard encryption keys using the highest-grade security standards so they can never be misappropriated.

With these capabilities, your blockchain network will have the added protection it needs to prevent attacks from within and without. To learn more about the only fully integrated enterprise-ready blockchain platform designed to accelerate the development, governance and operation of a multi-institution business network, check out IBM Blockchain Platform.