The rise of blockchain at SXSW: Part 2
In my last SXSW round-up blog, we left off with a recap of SXSW Interactive, where blockchain and distributed ledger technology (DLT) was far and away the hottest topic. I thought this would be a great opportunity to quickly explore what blockchain technology is, and highlight some downsides and upsides to this disruptive technology.
What is blockchain?
So, what exactly is blockchain? In the simplest of definitions, blockchain is a decentralised and distributed shared ledger for recording and validating transactions, which provides trust in an untrusted environment. Verifying of transactions, or ‘events’, is done without a central intermediary to slow things down or increase cost of transactions and, therefore, is consistent with the speed and agility demands of a digital economy.
Think of the blockchain as a simple public ledger in the cloud, and why the space is also referred to as DLT in some enterprise circles. This ledger is populated (append only) via a decentralised network of nodes that record transactions with a digital signature in its header. A group of transactions are approved at once and then added to the ledger. They’re called a ‘block’, and are continuously and sequentially added to the ‘chain’ of records, hence, the name ‘blockchain’. Each successive block contains a ‘hash’, an encryption algorithm that provides a unique result of each block. Tampering with any record in the block will cause the hash to change and show attempted fraud. Therefore, cryptography (via these hash codes) is used to secure the authenticity of the transaction, removing the need for a central intermediary to verify or settle the transaction record. Once entered into this distributed shared ledger, the record becomes permanent, cannot be modified, and is shared to anyone on the peer-to-peer (P2P) business network who has been previously granted access to the ledger. So, rather than a single entity knowing one party completed a transaction, the entire community now knows and acknowledges the transaction, and attains consensus. The excitement here is looking at how to use the same authenticated, distributed, and decentralised protocol to rethink transaction processing or recordkeeping in a more efficient, less costly manner.
Where did blockchain start?
The creation of blockchain technology was born from the creation of the most well-known of cryptocurrencies, bitcoin. The first blockchain database was invented by Satoshi Nakamoto, with details around the technology released in a white paper, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, published back in 2008 (Click here for white paper). By inventing a trusted P2P network that eliminated the need for traditional banks, Nakamoto solved the problem of what’s known as ‘double spending’, where cryptocurrencies like bitcoin could be spent more than once or the digital file could be manipulated, or even deleted. Now, 10 years after the release of Nakamoto’s famous white paper, blockchain and DLT are transforming operating models for many companies, because the business can go from a centralised transaction model to a decentralised one.
Two important metrics to consider here are speed and cost. In a traditional centralised model, a transfer can take days with efficiency varying by countries and/or institutions. Also, there are high costs due to the number of intermediaries that need to provide the services necessary to settle payments. In the decentralised model, settlement is near real-time, and there are lower direct costs of a transaction due to distribution of processing across the network. For the long term, improvements to speed and reduction of costs will mean everyone on traditional centralised systems will be disrupted.
Speed, scalability, power, and blockchain’s impact on the environment
According to a survey conducted by the World Economic Forum, 58% of executives anticipate 10% of global GDP will be stored on the blockchain before 2025. Credit Suisse concurs, expecting the technology to reach full maturity by that same year. In fact, The Credit Suisse Group is so bullish on the technology that it recently announced, along with ING Groep NV, it completed a EUR 25 million (USD 30.48 million) securities lending transaction using blockchain-based software (Read the PR).
But is there a downside to this disruptive technology? One could argue, yes, with speed and scalability coming to mind. Why? Because, while centralised systems can conduct thousands of transactions per second, only six to 12 transactions can be conducted per second using blockchain. That’s because it takes time to send transactions out to so many nodes, validate and then gain consensus across the distributed P2P network, according to Dr. Julian Hosp, one of the world’s premiere experts on blockchain technology who presented at the SXSW Interactive session titled ‘What is Blockchain? How Will It Change the World?’. Any transaction recorded in the shared ledger can only be completed when all parties – or miners – involved in the blockchain have updated their ledgers.
A second concerning issue is power consumption and the potential impact on the environment. I mentioned earlier about the need for complex algorithms and the linking of multiple machines. Since its inception more than a decade ago, blockchain requires encryption to securely record transactions, track assets and then verify those transactions across the distributed P2P network. This requires significant computing processing power. In fact, every individual Bitcoin transaction eats up 275 kWh of electricity, more than the individual energy consumption of 159 of the world’s countries, according to statistics released last December from the Bitcoin Energy Consumption Index (BECI), which also reported that ‘Bitcoin mining will require all the electricity produced in the U.S. by July 2019, and all the electricity produced in the entire world by February 2020.’ Additionally, the BECI reported that ‘the Bitcoin network is mostly fueled by coal-fired power plants in China, resulting in an extreme carbon footprint for each unique Bitcoin transaction’.
To be fair, I should mention there are initiatives to mitigate some of the issues currently present in blockchain networks. First, in terms of addressing scalability so that transactions per second rival the Visa network, two technologies are gaining momentum to enable scalability on the Ethereum network:
- State channels: a way of having an infinite number of transactions amongst a number of different actors that are initialised on the blockchain and then netted and finalised on the blockchain.
- Plasma: technology that enables us to build blockchain systems and anchor them into a smart contract into Ethereum. It can be constructed to handle thousands of transactions and has the capability to back-out erroneous transactions as a safeguard.
Sharding is another technology in development that will take Ethereum to a point where it can handle infinite number of transactions per second. This allows for more computers (validators/miners) to join the system via shards, to linearly increase the amount of transaction processing to eventual infinite number of transactions.
As far as energy consumption, enterprise blockchains are probably not going to use the current ‘Proof of Work’ or mining consensus mechanism and, as a result, won’t create the energy burn that currently exists today. Also, ‘Proof of Stake’ (creator of the next block is chosen via random selection and wealth or age, i.e., the stake) is an algorithm to achieve distributed consensus that is gaining popularity. It’s designed to require less energy from computers, and/or less powerful devices, even being able to validate transactions from a device as weak (in term of battery power) as a phone. Another mechanism is the ‘Oracle’ concept (wisdom of the crowd – if most of the crows believe something, there’s enough consensus to validate the precept). I can see hybrid model with ‘Proof of Work’ and ‘Proof of Stake’ working together to gain the best consensus on the network.
The upside of blockchain: a use case from healthcare industry
While speed, scalability, power consumption, and the impact to our planet are potential red flags for this disruptive technology, let’s examine an upside. A use case from the healthcare industry points to the benefits of blockchain technology.
Case in point: When a person needs urgent medical care on site, or is taken to a trauma room for emergency care, I think it’s safe to say that most of us wouldn’t have our health records in hand. I also think it’s safe to say that most of us don’t trust putting our medical information into a centralised database. If you’re not sure about the latter, consider the PR crisis that’s consumed Facebook recently. Facebook CEO and found Mark Zuckerberg said recently that ‘most of Facebook’s two billion users should assume their data has been compromised’. Lastly, our healthcare system here in the US, even at its best, is a patchwork of doctors, specialists, hospitals, clinics, and pharmacies. Sound familiar? So, how can blockchain technology help the healthcare industry, bringing all these disparate parts together? What’s a solution?
Blockchain can help with managing medical recordings, for example, moving away from an entity owning patient data and empowering the patient to execute their right to not only share their medical records with whomever they choose, but truly own their information while eliminating fraud.
A starting point is to create a decentralised storage system, where patient records can be stored and shared between healthcare providers and insurance company across a distributed P2P network. The goal is to move away from an entity or institution owning patient data. In our example, the patient works with her healthcare provider to create a smart contract, giving her complete control over which types of data (X-ray and medication) are shared and with whom. Blockchain helps the patient execute her right to not only share which medical information she wants, but also own her records. She holds the key, literally, to releasing which records can be shared and with which healthcare providers, clinics, pharmacies, and insurance companies. The records are entered into the blockchain, encrypted, stored, validated and then only our patient can cryptographically sign.
Distribution across the P2P network here is also important, because it’s the trusted distributed network that provides greater security for the patient’s records, greatly reducing a hacker’s ability to access this distributed, encrypted data, since access to the records requires her key provided only by the smart contract and there’s no single point of entry.
Moving forward, blockchain technology with a decentralised storage has the potential to help healthcare providers and insurance companies take a much different approach to our healthcare. Because of a trusted blockchain of transactions, the industry can leverage the latest technology in artificial intelligence, machine learning, and IoT to take a new approach that’s more predictive, proactive, preventive, and eliminates fraud.
Coming up next…
Next up in my blog series, we’ll continue to look at the growing trend of blockchain and DLT, including its impact on other industries. We’ll also examine, how to make blockchain applications more useable in infrastructure layer, and ask the question, will Ethereum change the world?
To learn more about the emerging blockchain technology trend, I encourage you to read the blog ‘Blockchain, machine learning, robotics, artificial intelligence, and wireless technologies will reshape digital business in 2018’ featuring commentary by my esteemed colleague, Ettienne Reinecke, Dimension Data’s Group Chief Technology Officer.
Until next time…