Blockchain Challenges

When the automobile replaced the horse and carriage, it was just considered to be a faster horse.

What you might ask, does this have to do with blockchain and its challenges and opportunities? Let’s begin by considering the challenges and opportunities presented by the automobile when the first person stepped into the first car.

Now think of the car you drive today. It has built-in assistance and security systems that enable it to communicate with you, your car dealer and, if necessary, emergency services. And think how our world today is structured around the automobile: from local civic planning to international trade agreements.

What the automobile did for the world of transportation, the internet did for media. When the internet started twenty-five years ago, it was a complex, impenetrable environment populated with innovators and early adopters. Today, according to a Forrester Research study, reliance on the internet for commerce, communication, entertainment, and social lives is growing. What was pursued in the past by a few, is now  pursued by the many. It is embedded and integrated into our regular routines and in our language: we “bookmark websites” and we “Google to find products and information.”

Now consider blockchain—a software platform for digital assets. Blockchain is said to be the most consequential technology innovation since the internet.

How Blockchain started

Blockchain is best known as the technology that underpins bitcoin, which was found to be exceptionally robust and highly extensible. Since its introduction, several new and existing businesses are developing new products based on blockchain. In particular, the financial services sector is investing heavily in blockchain startups and is funding research initiatives worldwide.

How Blockchain works

At its core, a blockchain is a distributed database where all participating parties have access to the entire dataset. As the name suggests, the data is stored in blocks that are chained together. One or more transactions make up a block, which when bundled together with the fingerprint of the previous block in the chain are run through a complex mathematical process to create a block.

This combination of strong cryptography and linking blocks of transactions in a chain makes for an exceptionally secure place to store records.

How Blockchain creates trust

Blockchain offers the opportunity to remove, or at least limit, the dependency on third parties to verify and record transactions. The trust will reside in the mechanism and in the ability of all participants to verify a transaction. Money moves from the buyer to the seller—and the network operator and taxation authority—immediately, and in a verifiable way that is seen by all participants.

Blockchain operates on an enforced kind of consensus: as all participants operate independently either submitting transactions to be processed or creating the blocks in the chain, things can happen concurrently. The network resolves these occurrences with a simple rule of “longest chain wins.”

The network and all participants continue and the longest chain becomes authoritative. This enforced consensus is what creates the immutability of the records stored in the chain since each block in the chain is built from the preceding block and, in turn, is used to build the next block. With this process, it becomes exceptionally difficult to alter a record since it would require all blocks after it to be changed as well.

This creates a kind of built-in risk management system when used with the longest chain rule. Retailers can set their own levels of confidence. Low-risk transactions like buying a cup of coffee can be considered safe after they are two blocks deep. However, a million-dollar house might need to be several hundred blocks deep to be considered safe. The further back in the chain, public chains at least, the more you can consider the transaction permanent and trustworthy.

You can easily envision the benefits for the financial services industry: faster, lower cost, immediate and easily verifiable transactions.

How Blockchain will affect our world

Like the automobile and the internet, Blockchain offers both challenges and opportunities to completely change the world in which we live. Following are four examples:

  1. Smart contracts
    Other than regular financial transactions, the concept of smart contracts coded into the transaction has the more immediate potential. Imagine, someone agrees to buy 100 widgets from a supplier as long as the exchange rate remains within a given range. The transaction itself would know that and, if the exchange rate fell out of the range, ownership of these widgets would revert to the supplier without any intervention.The opportunities for smart contracts are almost limitless. Imagine if your ERP system could allocate budgets to departments where the allocation and spending rules were built into the “money.” Audits or waiting for approvals would no longer be relevant since the allocation could not be spent incorrectly. Additionally, a deposit you paid on a large purchase would immediately be returned or forfeited pending approval or expiration of an agreement without any intervention.As you can see, fantastic opportunities exist to embed business rules directly into transactions, so that when conditions are met they can execute themselves.
  2. Trusted computing
    If smart contracts can be coded into the transaction, why not actual computer code? In fact, the ideas are one and the same. Trusted computing is central to how much of the internet runs today. Consumers can trust websites that take credit cards, recipients get encrypted email and messages unaltered, and applications and updates from a manufacturer can be trusted.Mostly, all this works well. That said, the current model of security for much of the world is based on security certifications issued by centralized third parties. Even so, these factors—criminals becoming increasingly sophisticated, nation states involved in espionage, the sheer scale of the internet and its continued growth—come together to paint a grim picture of security and privacy in the future.Many of the same concepts that apply to smart devices that comprise the Internet of Things (IoT), can be applied to the array of servers, virtual machines, neural networks, and databases that make up the backend of the internet—generously described as the cloud. The cloud, of course, simply means “someone else’s computer.” This is not to say the companies currently dominating this market have not done an excellent job of securing and automating their networks, but we are again back to the idea of scale—at some point centralized management begins to break down.

    While blockchain is not going solve all security issues overnight, or spontaneously cause the downfall of oppressive regimes, as a technology it does offer us alternative opportunities: we no longer have to build bigger more complex solutions based on centralized trust models. The answer is likely going to fall somewhere in between, but we now have a working model of how to build a secure distributed network that can be trusted by all participants.

  3. Identity and authentication
    Increasingly, online security is becoming a priority for businesses, governments, and individuals. Weekly, we read about data breaches exposing people’s identities, password hashes, credit card numbers, email addresses, and all other types of personal and private information.Even though blockchain is not a magic bullet designed to solve existing challenges, it does help to solve some of the challenges. For example, in the case of stolen credit card numbers, what if there were no credit card numbers—only people’s public key addresses? That would save us all the annoying hassles associated with cancelling and renewing our credit cards.
  4. IoT and micro transactions
    One of the most exciting opportunities is how the technology can be applied to the IoT. Gartner forecasts that 20.8 billion connected things will be in use worldwide by 2020. Managing these devices (things) will be tough: as evidenced recently by using IoT webcams to create a DDOS botnet. As these devices continue to proliferate, centralized management will become completely impossible.At its core, managing IoT is a problem of scale, something blockchain is good at solving. Blockchain presents a unique set of capabilities to allow devices to “manage” themselves. Companies could publish instructions, updates, or configuration information on a blockchain, then devices would autonomously read and verify to execute the new instructions.Typically, in business we talk about B2C or B2B: Business to Consumer or Business to Business types of transactions. With the proliferation of autonomous devices, we now need to look at how to handle Machine to Machine transactions, or M2M.

    Micro transactions have long been the Holy Grail of monetization of the internet. Almost all “free” services on the internet are driven by advertising revenue, along with the associated privacy implications that come with collecting personal information.

    While micro transactions have long been thought of as a way to enable “pay as you go” types of services, the cost of the transaction typically outweighs the value of the transaction itself. With M2M transactions there is no personal information, or even a person to receive advertisements.

    However, blockchain, with its much lower (and decentralized) transaction costs, along with its ability to bundle or hold transactions in escrow until a minimum is met, presents many opportunities for a clear path forward to monetize IoT, while also providing much needed security and device management.

A glimpse into a Blockchain future

We cannot know the impact blockchain will have on industry, governments, and society in the future. But we can imagine it like the internet is today, embedded and integrated into our daily lives.

For example, we will fully trust our transactions as they will execute themselves when conditions are met. We will enjoy less costly and more immediate services from our bank. We will live in a safer and more secure world with the threats that computer hackers and predators pose greatly reduced, and the growing threat of wide-scale cyber-attacks on critical infrastructure also reduced because with blockchain, IoT will deliver much needed security and device management.

And that car in the driveway, will drive itself. Self-driving cars are a near-term technology with the potential to leverage some of the technology of blockchain. When an individual car is not being used by its owner it can be assigned to a fleet for hire. Networks of cars could negotiate bulk purchase of fuel or electricity in automated markets, drive themselves to the dealership for maintenance, and pay directly using money they had earned by hiring themselves out.

Because those self-driving cars alone will generate major shifts and disruption within the automotive industry, it follows that our world tomorrow will be structured around blockchain technology, just as it is structured around the internet today.

Allan Zander
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Allan Zander

Regular Planet Mainframe Blog Contributor
Allan Zander is the CEO of DataKinetics – the global leader in Data Performance and Optimization. As a “Friend of the Mainframe”, Allan’s experience addressing both the technical and business needs of Global Fortune 500 customers has provided him with great insight into the industry’s opportunities and challenges – making him a sought-after writer and speaker on the topic of databases and mainframes.
Allan Zander
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