The immense potential of the Blockchain..(3/5)

“We should think about the blockchain as another class of thing like the Internet — a comprehensive information technology with tiered technical levels and multiple classes of applications for any form of asset registry, inventory, and exchange, including every area of finance, economics, and money; hard assets (physical property, homes, cars); and intangible assets (votes, ideas, reputation, intention, health data, information, etc.)…”.  Melanie Swan (2014)

Blockchain-blue

To recap, the fundamental concepts of the Bitcoin again –

  1. The Bitcoin is a digital currency with no physical representation and no central issuing or controlling monetary authority
  2. The ownership of bitcoins is tracked and validated in a global public ledge called the Blockchain. The blockchain tracks every transaction ever made using the bitcoin with new pages being constantly added
  3. Strong cryptographic algorithms are used to authorize transactions. Nodes called ‘Miners’ perform this task.

Blockchain is the #1 trend in financial services from an industry perspective when you consider the below data points-

  1. About a billion dollars of venture capital investment has flown into a range of startups with half of that investment coming in the last 12 months[1]
  2. Forty two of the worlds largest Banks have formed a consortium – “R3” dedicated to researching Blockchain technology [2]
  3. The Linux foundation partnering with technology vendors led by IBM, Swift, Digital Assets & Microsoft are either pioneering open source projects (OpenLedger)[3] as well as offering “Blockchain as a Service” type clouds.
  4. The overarching goal of all of the Open Ledger Project is to make the Blockchain more enterprise grade and feature rich for businesses to adopt. Blockchain development is following that of the Linux kernel which undergirds a range of systems from massive public clouds to enterprise datacenter servers to the Android mobile OS.

What is Blockchain?

The easiest way to define the Blockchain (BC) would be to to call it a “a highly secure, resilient, algorithmic & accurate globally distributed ledger (or global database or the biggest filesystem or the largest spreadsheet) that provides an infrastructure pattern to build multiple types of applications that help companies (across every vertical), individuals and society discover new business models, transact, trade & exchange information & assets. 

The term Blockchain is derived from a design pattern that describes a chain of data blocks that map to individual transactions. Each transaction that is conducted in the real world (e.g a Bitcoin wire transfer) results in the creation of new blocks in the chain. The new blocks so created are done so by calculating a cryptographic hash function of its previous block thus constructing a chain of blocks – hence the name.

As we can see from the above, the Blockchain lies at the heart of the Bitcoin implementation & is the most influential part of the BTC ecosystem. Blockchain is thus both a technology platform and a design pattern to building global & vertical scale industry applications that makes all of the above possible. It can alternatively be described as a database or a global ledger or even as a distributed filesystem.  All of these properties that makes it possible to be used as a platform for digital currency also enable it to indelibly record any kind of transaction – be it a digital currency ,or, a medical record, or, supply chain data, or, a document etc into it.

Blockchain

                                          Illustration: Key Characteristics of Blockchain

The most important characteristics to know about the Blockchain –

  1. Blockchain is the first truly global platform. Anyone with a simple mobile device or a PC can access it using a simple Wallet application – without the need for a middleman. Based on this type of universal access, the Blockchain as a design pattern and business foundation will enable the creation of a range of business uses. The only limit is the ingenuity of thinking.
  2. Virtual currencies are but one of the kinds of highly distributed applications that can be built on blockchain. Blockchain will likely eventually become the embedded economic layer of the Internet permitting not just currency or payment related activities but a whole range of others. Bitcoin & online payments are some of the first applications built on Blockchain. However the killer app is years away from being invented.
  3. Pathbreaking Applications built for Blockchain will upend business models in almost every industry vertical. It will help startups create new business models. We will examine some of these in the final blogpost in this series.
  4. Blockchain is highly secure & immutable thanks to the ingenuity of the architecture as conceived by Satoshi Nakomoto. We will examine the security implementation in the next post but the Miner nodes not only derive hashes of the transaction blocks but also successively combine them into data structures which preclude deriving the data from the hash function.
  5. Blockchain is highly transparent and auditable as transaction blocks are openly available for introspection are published as evidence that demonstrate the integrity of the blocks.This overall paradigm makes it very mathematically intensive and almost computational impossible to create fraudulent new blocks of transactions, as other transactions are continuously being validated.
  6. Blockchain is also highly reliable in that every node running a full configuration maintains a copy of every transaction executed in the system with only an identifier needed to track ownership – a digital address. Anyone can find out the set of transactions and who owns what using a simple web browser application called an explorer.
  7. Due to its flat, peer to peer nature – Blockchain conclusively eliminates the need for any middleman – thus disinter-mediating existing structures in many industry verticals. E.g Financial Services, Supply Chain Management, Real Estate, Healthcare etc. Thus next generation applications and platforms built over the next few decades will need to consider the blockchain.
  8. Blockchain is also digital and introduces the important notion of programmable instruments – be it currency or contracts. An important illustration of the possibilities of blockchain are what are termed – “Smart contracts”. These are rules embedded with a contract that can automatically trigger based on certain conditions being mer. E.g. a credit pre-qualification or a lawyer’s approval etc.
  9. The other point that is not stressed enough is that in addition to the highest levels of security, the blockchain also enables a high velocity of transactions. As an example, if two consumers are connected to the blockchain – one a home buyer & the other a seller, they can find each other, verify the authenticity of the title & any liens on the property, credit pre-qualification etc and finally conduct the transaction in realtime without the need for a middleman (a Bank or a Clearinghouse or a Real estate broker).
  10. Blockchain technology thus has massive potential to be applied in any industry situation where data security & identity theft are major challenges. This includes a plethora of usecases across financial services, retail, IoT, manufacturing, healthcare & real estate.
  11. A point of confusion for a lot of corporations around this technology is the perceived need or dependence around a publicly accessible database – much like a public cloud. However, the Blockchain is an extensible technology paradigm more than an actual platform. To further illustrate this point, there are potentially three types of blockchain implementations possible – a Public Blockchain, a Vertical Industry specific blockchain and a Private Organization blockchain. These could be run inside private clouds with enhanced & business specific security and authentication procedures as applicable thus serving a community of interest.

These key characteristics of blockchain technology open the door to dis-intermediating third parties from myriad business transactions, lowering transaction costs down to a fraction, – ultimately increasing the potential for innovation in every major industry.

In Conclusion – 

To recap, Blockchain is essentially a system & architectural design pattern for recording transactions with the highest degree of security, transparency and anonymity. Bitcoin is but the first application of this ground breaking platform.

Though Bitcoin is the first and the most famous killer app for Blockchain, it is a vastly different way of thinking about existing business verticals and usecases – in terms of efficiency,  reliability, speed & security.

Having said all of this, it bears note that Blockchain is still in its nascent stages of development and has a few years to pass before real world applications can be built on it.

Thus, it is only natural that several questions crop up in the minds of Industry architects, managers and executives.

  1. What are the technology underpinnings of the Blockchain?
  2. What are the major usecases across verticals like Financial Services, Insurance, Healthcare, Manufacturing etc
  3. How can horizontal areas like IoT leverage it?
  4. What are the ramifications for Applications, Data Architectures & Infrastructure?
  5. What should our strategy be in the face of this disruption?

The next post will speak to the technology underpinning the Blockchain. The final post in this series will answer the remaining questions in terms of usecases and business strategy.

References:

[1]  www.coindesk.com/bitcoin-venture-capital/, and Deloitte analysis.

[2] https://en.wikipedia.org/wiki/R3_(company)

[3] http://www.linuxfoundation.org/news-media/announcements/2015/12/linux-foundation-unites-industry-leaders-advance-blockchain

6 thoughts on “The immense potential of the Blockchain..(3/5)”

  1. This is the best ever post on blockchain business uses and architecture. Please keep us up to date like this. This site is a fantastic resource for us in Banking.

  2. Simply awesome. for a layman like me your blog is a great start. I request you to write blogs on smart contracts and other unorthodox use of this concept. To be precise, what kind of use cases do you foresee in Loyalty ecosystem that Blockchain may/can address?

    1. Joy, thank you for stopping by! I have a list of topics I am writing on and intend to cover over the year both business and technology. Will remember to cover Smart Contracts, Its been a while since I did anything on Blockchain but have tons of requests from clients as well. Again,appreciate your readership and support.

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