Finance

The Key to Blockchain Adoption: Make It Cheaper

Image via Shutterstock

Like elephants walking trunk to tail, each block in a Blockchain is tied to the next by special encoding. (Image via Shutterstock.)

An awareness is dawning in the industry that blockchain—the technology behind (really, interwoven with) BitCoin—is the main story. BitCoin is almost a distraction, a sideshow to the real deal.

Most people have heard of BitCoin, the “cryptocurrency.” In simple terms, BitCoin is value that resides in computer networks. It seems to be mysteriously reliable, partly because it is verified by multiple parties.

Some people know about “blockchain,” part of the protocol that BitCoin uses. (Techonomy first wrote about it in June 2014.)

But not many understand the subtle philosophical questions this technology opens up. Trust comes from the network. There is no central bank or timekeeper. Nearly costless value management allows micro-transactions that enable new business models. As my father might say, it’s a whole new world.

Although the nomenclature is a bit obscure, and the math is sort of magical, the concepts underlying blockchain are straightforward. The main idea is a public ledger, a record against which anyone can see whether a transaction contained therein is valid. The public part refers to the networking aspect of the architecture. All events (transactions in BitCoin) are stored in multiple places, each of which can be owned and operated independently. Encryption is used at multiple levels to build “blocks” of data, which are tied together like a string of elephants, each one’s trunk holding the next one’s tail. Each successive block holds enough detail from the previous block to guarantee their order. Thus, the blocks are “chained” to each other, making the blockchain. The order of all transactions within a block is also guaranteed. This iron-clad order is what makes blockchain a ledger. Everything is logged the way it came in.

This architecture allows a network to solve the Byzantine Generals Problem, which asks an arbitrary number of potentially cooperating generals, who may not know each other, to trust each other in order to achieve a shared goal (in their case, sacking the city; in BitCoin’s case, passing value around the network without risking loss). The importance of this schema is that the generals (or the traders) can each operate autonomously, having no need of a central organizer, enumerator, or verifier. As many parties as wish to can keep track of the indelible ledger. Anyone can write to it. No one can change it. A transaction can only be zeroed out by writing a counter-transaction. Both will exist in the blockchain for all eternity (or as long as the power grid holds up).

The reason BitCoin and blockchain are so intertwined is that when moving blockchain from a mathematical abstraction to a world of wires, silicon, and fiber, costs are incurred. A blockchain could exist fine on its own in a classroom, but even the professor and students have to run it somewhere, and that somewhere is the university computing system. Luckily for a well-heeled place like MIT, those resources are already paid for by tuition, generous alumni, and clever endowment investment departments. Out in the real world, someone has to foot the bill.

And that requirement is particularly onerous since an important part of the protocol requires that an artificial amount of work be done by the transaction loggers, the builders of the blocks (called “miners” in BitCoin). In the current BitCoin implementation, that work takes a datacenter-grade computing plant on average about 10 minutes to solve. The work, which involves finding a number among 2 to the 32nd power (4,294,967,296) possibilities, acts like a “captcha” or “proof-of-work” that guarantees that an event or transaction is valid. It protects the integrity of the blockchain.

But who is going to donate 10 minutes of their computing time for the good of all mankind? No one, really. At least, no one who owns such resources and may have a bank note on them.

That’s where BitCoin has become welded to blockchain. BitCoin rewards miners for doing the verification work, at least some of the time. The BitCoin protocol dictates that new coins can only be generated by miners who have successfully completed work proofs (building a valid block). The process is competitive, so only the miner who finds the number first gets paid. Once coins exist, they can be transferred. Outside users (non-miners) can buy them from miners and trade them to other users. Some banks and other organizations have agreed to trade currency or goods for BitCoins. So, the system has real value.

But what about non-financial uses of blockchain? Many companies, including IBM and Microsoft have begun to promote the idea that blockchain could be used for more than merely money. In a recent call with analysts, IBM pointed out a variety of potential applications beyond the financial area, many of which the company is already working on with customers.

Jerry Cuomo, an IBM Fellow and vice president of Blockchain Technologies at IBM, identified a “broad set of use cases,” including finance-related applications like “international remittances, commercial paper, and trade finance,” but also non-financial purposes like “securities settlement, airline reservations, supply chain logistics, commercial orders, compliance, health records, and data on individuals (such as identity cards).” Cuomo noted that while “most early adopters are in financial services … other industries [are involved] as well. We will see announcements this year in non-financial industries,” he said. (The recent Techonomy magazine featured another example: using blockchain to help the world’s poor stake a claim to what they already own.)

Cuomo opined that blockchain networks could even enable entirely new business models, like “temporal” or “micro” liability. The example he gave involved transferring liability for damage caused by a self-driving car rapidly among entities that might include the manufacturer, the owner, the garage, and others (e.g., when parking, when parked, when moving).

The key to getting beyond the cryptocurrency application is making the proof-of-work less expensive. If it were cheap enough, anybody could do it, and transactions of vanishingly small value could take place. For example, a high school could keep the official times of its track stars in a blockchain.

The good news is that blockchain has a dial rather than a switch for the proof-of-work function. That is, it can be fine tuned. The requirement can be relaxed by loosening mathematical constraints on the solution — in other words, by making it easier. Instead of taking 10 minutes on average to solve, it can take 1 minute, 1 second, or 1/10 of a second. (If you want to dive into the innards of how this all works, you can find some meat here.)

This flexibility will allow numerous blockchains to emerge in realms of business that do not require the expensive mining connected with BitCoin.

Cuomo indicated that IBM is looking at blockchain applications for “permissioned” networks. That is, an owner (e.g., a stock exchange) has to qualify users before they can get in, but once they’re in, the trust function can be dialed way down, reducing friction—and therefore cost—in the system. “Members are invited in,” he said, “which lessens the proof-of-work requirement.”

So, while the BitCoin network provides a way for (nearly) anonymous players to trust each other and execute financial transactions, blockchain can be uncoupled from BitCoin by decreasing the computational load. At that point, blockchain can do almost anything. Some people even talk about it “powering an alternate internet,” whatever that means. To get an idea of what some of the farther-out applications could be, read this article.

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