The Bitcoin Legacy: Salvaging the Blockchain

About two and a half years ago I wrote an article about Bitcoin. I explained the basics, the appeal, the changes in the market at the time and the overall trend, rounding it out as an article to advise on whether to pay attention or start buying them up. I wrote it shortly after the price for a Bitcoin had peaked at $1,240, and interest in the area was reaching critical mass. Much has changed in the space since then; prices have tumbled, public interest has moved on, and one of the currency’s largest support developers came out against what the ‘experiment’ has become, decrying the path it has been set upon. Social and economic interests aside, the creation and use of Bitcoin has provided something uniquely valuable to the world: the Blockchain.

Some Bitcoin Background

At this point I’d like to make something abundantly clear: Blockchain ≠ Bitcoin. This is a key differentiation. Although blockchain was born out of the original Bitcoin development, when I refer to one I do not mean the other. What makes it increasingly confusing is that the leading Bitcoin wallet is named ‘Blockchain’ (www.blockchain.info). The fact that this is still lost on some prominent individuals in the tech and financial services industry bolsters the argument for awareness and education being the first step in supporting Blockchain. Thus, for our purposes, instead of thinking of Blockchain = Bitcoin, think of Blockchain as a part of fintech, vaguely related to Bitcoin. However you can take many of the benefits of Bitcoin and attribute them to the underlying technology that is blockchain. Bitcoin has value attributed to it and is used as a reliable currency and form of payment for everything from food to sports tickets because there’s a level of faith and trust in the security of it. This is due to the way it keeps records of transactions; using the Blockchain. This secure and reliable log is what make Blockchain so important. In fact, in much the same way an early stage startup may ‘pivot’ from one product or idea to another, the entire Bitcoin support complex may find salvation in pivoting to using the Blockchain.

What is Blockchain

So what is Blockchain? Basically it is a digital ledger. It’s a secure database where anyone with access to the network can see the system of record.

Imagine the different stages of a clothing retailer supply chain. The stages we’ll look at are: the fabric producer, the clothing manufacturer, and the retail store. In a typical business network, each stage will have its own log of transactions it deals with on different systems, countries and servers. This creates several problems; firstly, this means there are multiple points of entry for malware or insurgents (hackers), lowering the security. Secondly, with different records there is the risk that they may be out of sync or not updated compared to other stages’ logs, meaning there are reliability concerns which require steps to verify — often from a third party system. Not only does this increase costs, but also the time for the whole process. Finally, should one stage update their logs, there is more time required to update everyone else’s, but the risk of information not trusted or agreed upon by the whole network remains. This could lead to shipping issues, the manufacture of extra jeans, or fewer pieces than expected arriving at the retail store. These issues don’t only exist in supply chain, but in financial transactions, accounting and countless other cases.

Now imagine you have a system that is automatically replicated across all participants, ensuring that all records are synchronized. Plus you trust the records you see because they can’t be updated unless the other systems in the network agree, and know where an asset (i.e. piece of clothing) is produced and at which stages it changes ownership. This means that it’s not just a number of records copied from a single location, but it shared completely across all systems. THAT is the power of blockchain. It is a single, secured ledger system that is shared across all users cannot be tampered with. Thus it is easier to share, cheaper, and more secure. (I’m currently in the process of writing a full-length technical description using analogies, pictures and potentially references to Kanye West, so look out for that.)

Uses for the Blockchain

You may already be able to see that the blockchain could have usability in a variety of different areas. The unique selling point (USP) is not that it can allow users to access data easily or keep data secure, but that it can do all of that with little maintenance and high reliability. Not only that, but it removes the need for large swathes of middle men and middleware. Whenever you need a system or group to validate and verify a user’s identity, or ownership in a trusted manner today we rely on third party system or company to do so. What if the system you used was the validation system itself? You would not need a third party to guarantee the validity of the information because there is an inherent trust by using the blockchain ledger system that information and transactions cannot be tampered with or intercepted, or even seen without access.

The scenarios where this would be functional are countless when you think about authenticating medical records, bank account transactions, enterprise accounting for sales, digital currency tracking, supply chains and much, much more. It costs less, is reliable, secure and easily shared — aspects I’ve repeated but that are very important and huge selling points for those who have to use annoyingly slow and expensive systems on a daily basis. I personally see this as having the potential to be paradigm shifting technology. Not in the sense that we’re all going to be using databases of blockchains next month, but over the course of proper implementation we can see a migration to these systems the same way we saw the eventual migration to digital, cloud-based computer systems.

The way this will impact the individual consumer is harder to explain at this point, since it’s more down the line. The biggest benefit obviously comes to enterprise software users and companies that keep huge records of everything from inventory to financial transactions. However down the line, you can be sure that you will be able to trust your services that much more. You get another email from a gaming company or retailer that your personal information was leaked, or that someone has your credit card history, and you may see service fees and savings be passed on to you in many ways.

Next steps for Blockchain

So where are we now? Well while we’re seeing the faith and support for Bitcoin being challenged by many, we still see a huge number of startups centered on the technology, and many coming up that can be applied to a more general Blockchain environment. What is more promising are the groups and consortiums of major enterprises that are already making big moves to get into the area.

First we have the Open Ledger Project. Led by IBM (disclaimer: I’m an IBM employee), it is a group of industry leaders in tech and financial services (banks, trading companies) under the Linux Foundation, working to collaborate on and support the implementation of blockchain. IBM is leading the development and establishment of standards to build the open source system to be used by the world. It serves to address the issues of a wide variety of users, and to show support of a transition to the shared ledger system.

Additionally, there was recently a test that the ‘R3’ consortium of 42 banks internationally ran to build a private distributed ledger running on open-source blockchain from Ethereum, and hosted on Microsoft Azure. Simply as a “modest” test case, and not even as a proof of concept, the banks used the technology to exchange digital tokens over a number of days. We also saw announcements at the World Economic Forum in Davos recently of the heads of the IMF, Deustche Bank and Morgan Stanley stating interest in blockchain, with dwindling or no support of Bitcoin. These serve not as progress in the implementation, but proof of the interest, awareness and belief that blockchain has the potential to transform.

Is it worth it?

I guess it comes down to: is it worth it? I’m not going to go down some cost and market sizing hole of ‘if the cost of implementation is less than cost of inefficiencies’ to make my point quite frankly because I don’t want to and I know the answer. If you take the time wasted, the extra technology and servers required and the length of processes that exist solely because we are using the same paradigm that existed back in renaissance Italy where the Medici family became prominent bankers in part due to their system of diligent record keeping, you’ll find that the forecasted gains are very difficult to understand. It’s been described by some — and I agree — that the shift to blockchain can be compared to the adoption of the internet. It took time, but after the early adopters jumped onboard and the technology became more and more understood, we saw more and more people and processes moving not only to digital platforms but web-based platforms. MS Encarta gave way to Wikipedia; requesting bank statements online was superseded by web-banking; and instead of ordering from your local bookstore via the internet, we have retail conglomerates that exist only online. Adoption will take time, but as it progresses we’ll see more and more people adopt and transform it into the go-to form of shared recordkeeping. For now, we’re off to a great start with the IBM-led Open Ledger Project with the development of an open-source blockchain, and the test-case of the R3 consortium of banks.

Blockchain (or whatever it’s finally called) is coming.

Savar is a graduate of the University of Pennsylvania and currently works at IBM