Blockchains - Looking beyond the cryptocurrency bust

The past twelve months has seen the crypto-currency bubble well and truly burst. Bitcoin is only the most largest, and hence, most visible digital currency to have lost most of its value. An index of the top thirty cryptocurrencies in use, CCI30 shows that these have lost in excess of 75% of their value since the beginning of the year, a loss that puts even the dot com bust to shame. Despite a lot of PR indicating otherwise, most financial institutions are steering clear of proving cryptocurrency services due to its high volatility, relative lack of liquidity and legal risks.

Busted – Cryptocurrency price index – Source: CCI30

Similarly, the past couple of years have seen a whole swathe of Initial Coin Offerings, or ICOs by companies raising cash in exchange of a crytpo tokens that can be used or traded once the service takes off. This is clearly an attractive way for tech companies to raise money. As no equity is given away, it is very cheap and comes with limited regulatory oversight. To date, approximately $19 billion has been raised this way, a lot of money that has lost value equally quickly. Over the past six months, crypto tokens issued through ICOs have also lost around 75% of their value, largely on a par of the losses of cryptocurrencies.

2018 Initial Coin Offerings - Source: CoinSchedule — 2018 Initial Coin Offerings – Source: CoinSchedule

Given that this sounds very inauspicious, is there no way back for cryptocurrencies? The jury is clearly still open, and the volatility of their value makes them not particularly useful for buying or selling goods. However, blockchain, the underlying technology which made bitcoin possible, has a number of characteristics that apply well beyond digital currencies.

4 key characteristics of blockchains

So what makes blockchains so interesting? Fundamentally, they are designed to be immutable – in other words, once something is written to it, it cannot be modified or erased. This clearly has value where information integrity is paramount, and where it is necessary to preserve a history of records. The immutability of Blockchains provides participants in the system with the confidence that the information they provide will not be modified, as well as guaranteeing that the information they are accessing cannot have been tampered with. In this way, document ownership can be proven and the provenance of digital assets can be determined with confidence. This characteristic can then also be extended to validating and securing the history of physical assets tagged by digital files.

Distributed Architecture

In a world where the Internet is increasingly concentrating power in the likes of Google and Facebook, Blockchains’ distributed architecture provides the opportunity to build services that are truly shared. They don’t rely on the data being held by a single party. They allow the distributed ledger to be shared across multiple parties, and thereby can help build trust in systems. Information such as contracts, financial documents no longer need to be held by a single authority, but can be shared across the parties exchanging the information.

Consensus-Driven

In order for a transaction to be accepted onto the shared ledger, there must be a means of gaining the consensus of the participants. This is a fundamental element of blockchains, and ensures that the distributed ledger contains only one version of the truth, and cannot be subverted or modified by one or a minority of participants. All participants have confidence that everyone sees the same transactions. The bitcoin “Proof of Work” is the best known example of a consensus algorithms, and is what is used when someone “mines” bitcoin.

Time-stamped

The distributed ledger that forms the underlying basis of a blockchain is fundamentally a series of time-stamped transactions. Therefore not only is there confidence in the content of a given digital asset stored in the blockchain, but you are able to determine unambiguously all the events, modifications and changes that were applied. In this way, all parties can agree on the provenance and ownership history of a digital asset.

A single Version of the Truth

When brought together, all these characteristics, made possible by clever cryptography, ensure that although the contents of the shared ledger are distributed across a wide network of participants, there will remain, at all times, a single version of the truth that is trusted by all parties and is difficult or impossible to undermine. It is this, that will ensure that blockchains will find use way beyond bitcoin and other cryptocurrencies.

Some Likely Application Areas…

Distributed Computing Architecture

As described above, the distributed nature of blockchain networks lends itself well to creating decentralised versions of current cloud-based services. In the Internet, strong network effects ensure a ‘winner takes all’, as manifested by the likes of Google, Amazon and Facebook. Similarly, at a cloud infrastructure layer, the Internet is similarly concentrated in a few infrastructure players – namely Microsoft, Google and Amazon. A number of startups are looking to up-end this status quo using Blockchain technology. DADI, which stands for ‘Decentralised Architecture for a Democratic Internet’, is a UK startup that uses blockchain to build a virtual cloud computing infrastructure using spare computing power in homes and businesses, while the Golem Project, is claiming to be building a distributed supercomputer. In a similar vein, Storj Labs are taking the same approach to provide distributed storage capabilities.

Record Storage and Sharing

A swathe of startups are looking to apply blockchain to build systems where different businesses and individuals can securely share and update documents. The healthcare space is one area currently receiving a lot of attention. The world-famous Mayo Clinic has teamed up with a company called MedicalChain in an initiative to build a single distributed digital ledger for the secure storage of medical records, where various health practitioners – family doctors, pharmacists, test labs can access and update the files. The advantage, as espoused by its founders is to allow patients to take control of their own records, facilitating mobility between health providers. Another company, SimplyVital Health is backed by Yale University, and is also focused on creating regulatory-compliant means by which healthcare providers can share patient data.

The use of blockchains for sharing highly-confidential information is not limited to the health sector. International Airlines Group (IAG), the parent company of British Airways and Iberia, recently invested in VChain, a blockchain startup creating a distributed database of passengers and their travel documents. Airlines are required by law to check travel documents prior to boarding. This is a requirement that is often complicated by passengers making mistakes in the information provided. VChain aims to create a shared database of travel documents, and return an indication of the reliability to the airlines so as to speed up pre-boarding checks.

Transactions, Market Places and Contracts

Given its genesis in digital currencies, it should come as no surprise that many companies are looking to use the technology for implementing digital market places or other transaction-based services. A number of companies, including BitTicket, a UK startup, and GUTS, based in the Netherlands are developing systems prevent tickets for events such as concerts and festivals from being sold on at inflated prices. These aim to create a single identity per person on a distributed ledger with the aim of defeating bots that buy tickets en masse online for the sole purpose of re-sale. This secondary market is worth in excess of 1 billion dollars, and recent efforts by many artists such as Ed Sheeran, have had mixed results.

A wide range of other sectors receiving the attention of Blockchain startups for transaction services. AidCoin uses the Ethereum blockchain to facilitate and track charitable donations to registered charities and to allow conversion from cryptocurrencies for donations. Similarly, GameFlip provides an online marketplace to share digital tokens for use primarily in game-related transactions, such as buying in-game goods. Given the size of the online gaming market, in excess of $100 billion, much of which is concentrated in the hands of a few key players, there is clearly potential here to change the way digital content is purchased.

Financial Services

The financial industry is looking at blockchains beyond their use in digital currencies. Its single constantly-refreshed distributed ledger, a tamper-proof transaction history, will help speed up a whole range of financial transactions. Citigroup, Nasdaq and Visa are all using a blockchain transaction platforms built by a company called Chain. A competing company, Ripple, is busying setting up a crypto-currency based platform for real-time international money transferring across different currencies. In effect this will compete with the SWIFT money transfer network used by banks, aiming to reduce the cost and speed of such transactions. Ripple claims to be working with up to 75 banks in rolling out its money transfer network.In a similar vein, many stock exchanges are looking to blockchains to speed up the process of settlement of trades when purchases are made – a process that currently can easily take up to three days.

Supply Chains and Logistics

Perhaps the most prosaic application of blockchains, but one which will likely have the widest reach, lies in the world of global logistics and supply chains. Modern supply chains are incredibly complex with multitudes of sellers, buyers and intermediaries spread across the globe, making it very difficult to be certain provenance of goods. This is particularly critical in industries subject to strong regulatory oversight or with health or safety implications. For example, in the food industry, a blockchain-enabled supply chain can provide full traceability of the food through to the original supplier, and can help build confidence in an industry where proving provenance is notoriously challenging. This can also aid in areas where sustainability is an issue (e.g. fishing). In safety-critical industries such as aviation and aerospace, tamper-proof ledgers can help prevent counterfeit parts enter the supply chain.

Not too fast now

While all this sounds exciting and gives the impression that blockchain roll-out is a done deal, there remain a number of hurdles to be overcome. First of all, most of these applications will need to make the jump from company’s innovation departments to their mainstream IT operations. Most of the examples described in this post are in proof-of-concept trials and not widespread deployment. Key hurdles to be addressed including ensuring that the consensus algorithms are efficient and do not rely on the horrendously inefficient “proof of work” algorithms that underpin Bitcoin. Current estimates are that the Bitcoin network consumes as much electricity as the entire country of Austria. Similarly, step change improvements are also necessary in the number of transactions that can be processed by the network.

Finally, and perhaps most significantly, where multiple parties are needed to work together in order to make a solution work (think health data sharing or any supply chain application), the IT systems of every participant needs updating in order to make the ecosystem work. This is not only a software problem, but may tie into manufacturing and logistics systems to allow for tagging and reading of physical goods. Nevertheless, despite all the hype, I would be very surprised if in five years time, blockchains would not be a standard and rather boring tool of most companies’ IT operations.

Blockchains – Looking beyond the cryptocurrency bust