The distributed ledger technology, better known as blockchain, has the potential to eliminate huge amounts of record-keeping, save money and disrupt IT in ways not seen since the internet arrived.
Blockchain is poised to change IT in much the same way open-source software did a quarter of a century ago. And in the same way that Linux took more than a decade to become a cornerstone in modern application development, Blockchain will take years to become a lower cost, more efficient way to share information between open and private networks.
But the hype around this seemingly new, secure electronic ledger is real. In essence, blockchain represents a new paradigm for the way information is shared and tech vendors and companies are rushing to figure out how they can use the distributed ledger technology to save time and admin costs. Numerous companies this year have been rolling out pilot programs and real-world projects across a variety of industries - everything from financial services to healthcare to mobile payments.
What is blockchain?
First and foremost, Blockchain is a public electronic ledger - similar to a relational database - that can be openly shared among disparate users and that creates an unchangeable record of their transactions, each one time-stamped and linked to the previous one. Each digital record or transaction in the thread is called a block (hence the name), and it allows either an open or controlled set of users to participate in the electronic ledger. Each block is linked to a specific participant.
Blockchain can only be updated by consensus between participants in the system, and when new data is entered, it can never be erased. The blockchain contains a true and verifiable record of each and every transaction ever made in the system.
While it has great potential, blockchain technology is in its infancy and CIOs and their business counterparts should expect setbacks in deploying the technology, including the real possibility for serious bugs in the software.
For example, one of the most prevalent blockchain platforms, Ethereum, doesn't support the use of decimal points in its script for smart (self executing) contracts. Those coding a blockchain network would need to create a workaround.
Why is blockchain now getting so much buzz? In a word, Bitcoin. Bitcoin is the wildly hyped cryptocurrency, a method of transacting payments over an open network using digital bits and encryption. It was the first ever decentralized one when it was created in 2009.Other forms of cryptocurrency or virtual money, such as Ether (based on the Ethereum blockchain application platform), have also sprung up and have opened new venues for cross-border monetary exchanges.
The term bitcoin was first... well, coined in 2008 when Satoshi Nakamoto (likely a pseudonym for one or more developers) wrote a paper about a "peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution."
What does blockchain do?
As a peer-to-peer network, combined with a distributed time-stamping server, blockchain databases can be managed autonomously to exchange information between disparate parties. There's no need for an administrator. In effect, the blockchain users are the administrator.
Additionally, blockchain networks can be used for "smart contracts," or scripts that automatically execute when certain conditions are met. For example, users of Ethereum's Ether exchange must meet pre-determined conditions that prove someone owns the cryptocurrency and have authority to send the money they claim to own. In addition, multiple blockchain users can create contracts that require more than one set of inputs to trigger a transaction.
One example: real estate transactions require sign offs between buyers, sellers and their financial institutions.
Public vs. private blockchains
There are a variety of blockchain permutations, and they fall mainly into one of two categories - public or private. Public blockchains allow anyone to see or send transactions as long as they're part of the consensus process. There are also consortium blockchains, where only a pre-selected number of nodes are authorized to use the ledger. For example, a group of banks and their clearinghouse might use blockchain as part of the trade-clearing, where each node is associated with a step in the verification process.
Private blockchains, in contrast, restrict the ability to write to a distributed ledger to one organization, such as a group of employees within a corporation, or between a set number of organizations, such as a number of banks that agree to a network partnership.
Which industries use blockchain?
Shipping. Fintech. Healthcare. Blockchains are being put to a wide variety of uses in several industries. In shipping, for example, a bill of lading for cargo shipments has traditionally been paper based, which requires multiple sign-offs by inspectors and receivers before goods can be delivered. Even when the system is electronic, it still requires multiple parties to sign off on cargo shipments, creating a lengthy administrative process. To try and streamline that cumbersome process, the world's largest container shipment operator, Maersk, recently announced it is using a blockchain-based ledger to manage and track the paper trail of tens of millions of shipping containers by digitizing the supply chain.
Each participant in the shipping supply chain can view the progress of goods through the blockchain ledger, understanding where a container is in transit. They can also see the status of customs documents, or view bills of lading and other data in real time. And, because it creates an immutable record, no one party can modify, delete or even append any one of the blocks without the consensus from others on the network.
Genpact, for example, announced a service for finance and accounting that leverages blockchain-based smart contracts to capture all terms and conditions between a customer and an organization for an order.
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