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Blockchain Beyond Bitcoin

Kurt MarkoBy Kurt Marko

Bitcoin became something of a sensation in 2013 when the value of the digital currency spiked from $13 in January to $1,128 in November. In March of this year, one Bitcoin was running about $1,100, despite possessing no intrinsic value, corporeal form or backing by any sovereign government. Thank ransomware rings, drug dealers and wealthy Chinese businessmen seeking to circumvent government capital controls by secretly exfiltrating cash.

Bitcoin’s most valuable payoff, however, may be in popularizing digital ledger technology using cryptographically secure blockchains. If that mouthful of jargon looks like a foreign language, don’t worry. The technical sophistication belies a simple foundation.

In fact, the concepts behind blockchain are as old as accounting itself, which explains why the world’s largest financial institutions have poured significant money into development efforts for blockchain-based services. They’re not alone, though. A recent report from McKinsey & Company says the technology is poised to disrupt a range of industries by the end of the decade. After surveying 200 companies currently using blockchains, the consultancy determined that the tech could help move $80 billion to $110 billion annually, with the bulk coming from business-to-business (B2B) payments.{ad}

You needn’t be a high-dollar consultant to spot opportunity, or to engage customers. Anyone who’s balanced a checkbook understands the basics of a ledger: It’s simply a list of account transactions, itemizing debits and credits. The foundation of blockchain is a decentralized digital ledger that can be shared by all stakeholders to a transaction. According to KPMG, distributed ledgers like those used in blockchains have six elements. They are:

  • Distributed: Every stakeholder has access to a complete copy of the ledger and full visibility into new transactions.
  • Time-stamped: Every transaction includes the exact date and time it was made.
  • Secure: All transactions are digitally signed with a secure hash function.
  • Immutable: Validated entries to the ledger cannot be reversed or changed.
  • Unanimous: Participants in the digital ledger all agree to its validity and accuracy.
  • Programmable: The digital ledger system exposes APIs that allow for automatic settlement of transactions, creation of self-executing contracts and other complex process flows using business logic.

Blockchains achieve these attributes through the use of public-key cryptography, one-way hashing algorithms and the ability to easily create distributed copies of digital ledgers. Every transaction in a blockchain is signed by the originator using its private key and the recipient’s …

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… public key. The recipient verifies with the originator’s public key and a private key-based digital signature. Other parties in the blockchain can validate the authenticity of the recipient by decrypting the signed transaction with the recipient’s public key. This process repeats for every transaction in a blockchain as illustrated in the (somewhat technical) video below.

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Blockchain transactions resist tampering by also using a one-way hash to sign every transaction and include its sequence number in the chain. Thus, changing any signed transaction invalidates all subsequent transactions by altering the hash values. You can try out different hashing algorithms using this site, and this video provides a useful visualization of the process.

The implications have Wall Street and other businesses excited.{ad}

William Mougayar, a venture capitalist and author of a book on the topic, noted in a recent interview that blockchain has ramifications across technical, business and legal domains. The technology promises to disrupt business by creating a digital exchange network enabling peer-to-peer, B2B transfers. Their cryptographic, time-stamped security and immutability can also serve as the basis for legally binding digital transactions that don’t require being certified by a middleman, like a notary or escrow agent.

Early use cases are for financial services — peer-to-peer payments, lending and microtransactions. However, just about every vertical has the potential to be disrupted. Governments could use digital ledgers for land and auto deeds and titles, along with all forms of registrations. As the energy grid becomes decentralized, blockchains will support distributed sales using microtransactions. Real estate firms could simplify title searches, insurance and escrow.

In health care, ledgers will make it easier to securely share medical records. Transportation and logistics firms can enhance trust among customers with no prior relationships and improve the …

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… accuracy, security and validity of documentation related to shipments and deliveries. The Blockchain Insurance Industry Initiative is piloting uses including streamlining paperwork and reconciliations while improving auditability.

Anywhere you can imagine bookkeeping and accounting improvements, think blockchain.

Birds & Worms

Although blockchain technology is rapidly advancing, turning it into useful business applications is still as much art as science. As Mougayar points out, blockchain platforms are immature and difficult to use, reminiscent of the early days of the web, when publishing a page required HTML coding. However, he expects the usability and maturity situation to dramatically improve over the next two years. While that means partners have time to be deliberative, first movers frequently get a business edge. By establishing a blockchain advisory service early, your firm can start building a reputation as the go-to source for advice and ideas.

Ready?

First, get to know the popular blockchain and distributed ledger frameworks, such as Ethereum, Hyperledger, Quorum and Ripple, and related blockchain cloud services, including those from Microsoft Azure, IBM and AWS/Digital Currency Group.

A number of channel-focused suppliers want to help you get started. Microsoft has advocated using blockchain to register and track products from manufacture to sale or placement in a composite SKU, and IBM and Cisco see blockchain as a natural way to securely share IoT data. At a recent conference, Dell said it has set up a dedicated blockchain practice and an innovation lab to prototype uses for smart buildings. Verizon sees uses around digital rights management.{ad}

Talk with customers about business problems that may be amenable to smart contracts and digital transactions. These discussions should suggest service opportunities. Options include blockchain training, setup, and infrastructure and application administration, but be creative. Investigate partner opportunities with strategic vendors, such as the IBM blockchain ecosystem, and talk to retail customers about blockchain financial services from Visa and MasterCard.

When considering opportunities, don’t limit yourself by merely using blockchain to streamline existing processes. Instead, consider how it might enable new services that weren’t previously possible. In other words, don’t only think about how to improve the bottom line, but also ways to increase the top one.

Kurt Marko is an IT industry analyst, consultant and regular contributor to a number of technology publications.
LinkedIn: linkedin.com/in/krmarko
Twitter:
@krmarko


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