Blockchain. It was in every headline for a few years; it was the subject your really intense cousin would never shut up about at Christmas; and in 2018, it crashed hard. Now, blockchain technology is making a more stable, more rational comeback in industries from health care to farming — and financial services are still leading the way.
The basic structure of blockchain consists of individual records, all connected using cryptography. This infrastructure allows blockchain networks to be distributed — not necessarily run by a central authority — while maintaining security, because nobody can change just one block in the chain. It’s an appealing model for many sectors, promising transparency and trust as it helps make value exchange possible.
Bitcoin and other cryptocurrencies dominated the roster of peer-to-peer blockchain companies when the technology first emerged, and there is still promise in that area. Facebook is planning the release of its Libra cryptocurrency; the People’s Bank of China and the European Central Bank are discussing central bank digital currencies; and the venerable JPMorgan Chase is also getting into the act.
J.P. Morgan and Libra are both using stablecoin, which reduces the traditional volatility of cryptocurrencies by tying them to assets that are, as the name suggests, stable. These may include other cryptocurrencies but also could be commodities or fiat money. Stablecoin is one example of how the new generation of blockchain platforms is maturing, seeking sustainability and growing acceptance rather than the extreme hype of future years.
One company making the pivot is HIVE Blockchain, which links traditional markets to cryptocurrency and other forms of blockchain. Its net income in March was $3.4 million, demonstrating the potential for the technology to go mainstream. A recent article also predicts that stablecoin will reach its full potential during 2020, and that cryptocurrencies will bring in about $1 billion this year.
Cryptocurrency is only one way that blockchain has entered the finance sector, however. Smart contracts, supply chains, artificial intelligence integration and social network security all affect financial companies in several ways, and blockchain is beginning to have an influence on all of those areas. For instance, the IDC predicts that more than half of businesses will use blockchain to enable their AI transformations, efforts that are expected to get $57.6 billion in spending worldwide this year.
Analysts have taken these factors into account. Gartner, for example, recently put blockchain on its list of the year’s top 10 strategic technologies. A study the company conducted of chief information officers found that 60% expected their firms to start or continue adopting blockchain-based technology between now and 2023. That’s also the time frame in which Gartner predicts that public blockchain solutions will clear up concerns related to interoperability and scalability, issues that are preventing many enterprises from deploying the technology.
As each blockchain platform establishes itself, it has to tackle the “blockchain trilemma.” Just as the old engineering proverb says clients have to pick two of fast, cheap or good, any blockchain network has to make compromises between security, scalability and decentralization. No infrastructure can have all three in equal parts: at larger scales, decentralized networks become less and less secure. Each blockchain network — and its customers — therefore have to choose two of the three qualities that take highest priority.
Blockchain networks can distinguish themselves on two different axes: private versus public and permissioned versus permissionless. A network’s goals regarding the trilemma should define which approach it takes. For instance, bitcoin was a public, permissionless form of blockchain — anybody could read or create blocks, and public servers hosted the network. It was very secure, but it didn’t scale well.
Deloitte recommends private, permissioned forms of blockchain for most enterprise use. These require authorization before people can even join a network or read its information. The network operator, or people they permit to do so, can create content, but nobody else can. This is, of course, much more centralized than forms such as blockchain, but it scales much more smoothly.
A few complications have appeared lately in this basic dynamic. One is “federated blockchain,” in which multiple organizations can oversee a number of predetermined nodes, which in turn will approve blocks. This could allow an enterprise or consortium to decentralize a blockchain platform slightly, while maintaining security.
Large tech firms are beginning to offer “blockchain as a service,” another new arrow in the as-a-service quiver. BaaS uses the cloud as a basis for providing the results of blockchain, such as decentralized applications and smart contracts, without the hassle of setting up blockchain networks. Amazon and Microsoft both currently offer BaaS, and enterprises as well as startups are taking advantage of it.
Mobile apps are making themselves part of the blockchain ecosystem just as they are the rest of the financial services industry. Google’s Android and Apple’s iOS each offer a wide variety of apps for cryptocurrency trading, while a South Korean bank is deploying a blockchain app to let users identify themselves through their phones. Smart contracts are getting their own blockchain apps in China, as a recent programming language integration boosts interoperability.
With any advance in technology come security problems, of course, and blockchain is no exception, particularly where cryptocurrency is concerned. Aqua Security reports that nearly all the recent attacks on decoy servers occurred for the purposes of cryptocurrency mining. Mining attacks in general have decreased, however, and some experts say that blockchain might actually help improve cybersecurity: shared ledgers make transactions harder to forge and systems can be designed to promote good behavior.
Established firms such as J.P. Morgan and national governments are turning blockchain into less of a wilderness. Shanghai is issuing the first local security standards for the technology in China, and experts say that a national standard is likely to follow shortly. The US is also getting involved, requiring people to report cryptocurrency income, and companies such as Armanino are offering both Americans and Europeans tools to comply with regulations that govern blockchain assets.
Blockchain and cryptocurrency have come a long way from their origins in early decade phenomena like “Dogecoin” and “Coinye.” Developers are working out their own best compromises between decentralization, security and scalability, while standards organizations and federated networks are quickly resolving concerns about interoperability. Well-known financial firms and governments are getting into the action, further establishing blockchain as more than a passing trend.
Companies thinking about incorporating blockchain are, therefore, definitely on the right track. Furthermore, the increasing prevalence of blockchain as a service allows enterprises to get the benefits of the technology while leaving the intricacies of form and balance to third parties. However, the wide variety of complex options blockchain provides means that any company incorporating it needs to research the issue thoroughly. Adopters should know the potential issues well, examine how the trilemma relates to their organizational goals and evaluate security risks before making a decision.
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Isabel Kunkle is a technology and telecom editor at SmartBrief. She lives in Boston.