Blockchain technology: concepts, applications, and implications

Introduction

One of the most talked-about emerging technologies is the blockchain. Originally developed for Bitcoin, blockchain shows a tremendous amount of promise in terms of reducing certain types of friction, especially in business (Marr, 2018). Over the past couple of years, blockchain has been unpacked from cryptocurrency and a wealth of applications using the technology are in development. Many observers predict that blockchain technology will revolutionize a wide range of businesses (Marr, 2018).

What is Blockchain?

The heart of blockchain is the concept of the distributed ledger. The original idea behind Bitcoin was to develop a peer-to-peer currency, in the sense that a store of value and unit of exchange could be created without the intermediary of a central bank. The value of this currency would be determined by the forces of supply and demand, based strictly on its users, without the influence of interest rates and other monetary policy tools that are used by central banks to influence the value of their currencies. The way to resolve the issue of trust that naturally arises from a lack of a central bank, or any underlying asset, is the concept of the distributed ledger.

The value of Bitcoin could not be established on a peer-to-peer basis. The counterparties, even if known to each other, would have no legal basis for establishing that value, and in any case there would be not dispute resolution mechanism between them. The distributed ledger concept was developed to work around this problem. A distributed ledger is where all of the participants in the blockchain have copies of a transaction. Trust is based, therefore, on having a large number of records of any given transaction. These records are immutable, and the distributed nature means that there is a large number of people who can define the value of the transaction. This enforces honesty – it is very difficult to challenge the value and terms of a transaction when there are hundreds of people who have access to it.

Trust is therefore developed on the principle that counterparties are not to be trusted. Consider how this works for a blockchain contract. The contract will be recorded by dozens or more members of the blockchain. In a normal, paper contract the counterparties sign the contract, but those copies are the only public record. If there is a dispute, the original document is taken along with the nature of the dispute to court, and resolved through interpreting the meaning of the contract and whether the conditions have been fulfilled. In blockchain, it is understood that the counterparties cannot trust each other, but there are hundreds of others who have access to that same contract. There can be no dispute, in theory, about what the contract contains. This is obviously an oversimplification of how blockchain contracts would work, but it shows the potential of the technology to perform everyday functional business tasks in a complete different way, basically crowdsourcing trust.

What are the Benefits of Blockchain?

The reason that blockchain technology holds so much promise in business is because it offers certain benefits that are of interest to those in the business community. The three main ones are transparency, immutability and efficiency. The argument that blockchain is more transparent than other technologies relates to the public nature of the transaction. While the identities of the participants are hidden behind cryptography, the transaction itself is not. The idea is that a participant's transaction history is visible, so that a counterparty can view this history prior to entering into the transaction. Identity may not be known, but transaction history is, and that creates transparency that often does not exist outside of blockchain (Lisk, 2018). This transparency has been touted as especially valuable in supply chain applications, in that when goods move through the supply chain, the buyer can see the entire history of those goods, and know that the quality and authenticity of those goods has been verified at each step. Some benefits are a reduction in counterfeit goods, higher levels of quality assurance even in complex supply chains, and lower legal risk because of the transparency and immutability of the information (Lisk, 2018).

The immutability factor is also one of the benefits of the blockchain. The distributed nature of the ledger means that there are multiple records of any given transaction, and these are accessed. If someone wants to change a transaction after the fact, they would have to change all of the records of that transaction. Hacking one or two might be possible, but hacking all of the records, in order to create a false record, is much more difficult. This is why blockchain is considered to be immutable – cryptography makes altering completed transactions nearly impossible (Comben, 2018).

The immutability question, however, has been raised. While blockchains are touted as being immutable, the consensus nature of a blockchain means that 51% attacks occur – where only 51% of the records need to be altered in order for the false transaction to become the accepted one within the blockchain by virtue of simple majority (Comben, 2018). Another means of altering transactions in a blockchain is forking, where the blockchain agrees to rewrite history, as occurred when Ethereum was hacked and the entire blockchain re-written to omit the hack. If a majority of participants in a blockchain agree to forking, then the altered transaction will be allowed, again illustrating that the immutability of blockchain is more conceptual than actual. The point about immutability is that blockchain may not be 100% immutable, but that it is a significant improvement over existing ledgers, which often are bilateral, and relatively insecure.

The final benefit touted for blockchain is the efficiency. This is rather illusory. The reason blockchains are deemed to be efficient is that the distributed ledger system cuts out the middleman in transactions. The role of the middleman is often related to facilitating a transaction between two parties, and for this there is a fee. Blockchains rely on a different system of trust, and many transactions that rely on a middleman no longer require that intermediary. Thus, the counterparties save money on transaction fees, commissions or other mechanisms by which the middleman gets paid.

The problem of course, is obvious. There might not be transaction costs in the sense of fees and commissions for recording blockchain transactions, but there are costs. Those costs – notably the use of power to record a transaction hundreds more times than it usually would be recorded – are offloaded onto power grids, public utilities and the people participating in the blockchain. This inefficiency is a negative externality that allows blockchains to have the appearance of efficiency but actually means that they are less efficient (Miller, 2018). That said, this is a known issue in the blockchain community, and there are many companies working to resolve the efficiency problem (Miller, 2018; Zhao, 2018). If the energy consumption issue can be resolved, the transactional efficiency afforded by blockchain will be tapped more effectively.

Consensus

The consensus nature of blockchains means that the rules governing each blockchain are established according to the participants in the blockchain. This was most in evidence when Ethereum re-wrote history after the hack, as the participants decided that the platform would be better if that dispute resolution mechanism was utilized. The consensus must also be established between the different participants, even though the identities of those participants is not known. This may give rise to interesting situations where the consensus view is not aligned with being a good idea, but nevertheless many participants prefer the consensus attribute to the singular authority that many legal systems have. Right and wrong can be defined by the members of the blockchain.

This actually has tremendous advantage in countries where legal mechanisms are either difficult to access or cannot be trusted. There are also countries with relatively trustworthy legal systems that just happen to be very slow and expensive. The consensus nature of any transaction on a blockchain means that participants, for example in a supply chain contract, do not need to rely on determining legal jurisdiction in a dispute, nor about the costs of dispute resolution through a single court system. The blockchain serves as evidence of a contract and disputes go on the record of the participant.

Smart Contracts

One of the most promising uses for blockchain technology is the smart contract. Smart contracts are a way of utilizing a blockchain to cut out the intermediaries in a contract, such as lawyers (Rosic, 2016). Smart contracts are standardized forms of contracts. Once signed, the contracts are stored on the blockchain as a means of making them official and binding, through the consensus mechanisms. The contract can determine for example, when a counterparty needs to do something. As an example, if a company promises to pay for a load of potatoes to be delivered to a processing plant, when that load is delivered that information will be uploaded into the blockchain, and that will in turn trigger the contract to send the payment to the potato supplier (Rosic, 2016).

One of the interesting aspects of smart contracts is that they are agreements between counterparties, but the counterparties need not be in the same country. The smart contract may ultimately be universal in nature, whereas current contracts are always tied to a jurisdiction. Many contract disputes arise between counterparties in different jurisdictions because of things like differences in terminology, and in legal proceedings one company will often have more power than the other, if the contract is domestic to its jurisdiction. A smart contract eliminates jurisdictional issues as the contract is standardized, and enforceable by the blockchain, rather than a national legal system (RubyGarage, 2018).

Aitken (2017) notes that smart contracts are expected to be used by 25% of organization worldwide by 2022.What this means is that contracts will now become more standardized across the globe and will be universal. Blockchain participants can agree on what they want in a standardized contract, which means there will be many competing blockchains offering smart contracts, but the ones that best meet the needs of participants will be the most successful. Major technology companies are already offering blockchain contracts to enterprise-level clients, and this is one of the most promising aspects of blockchain technology from a commercial point of view (Aitken, 2017).

The downside is that smart contracts are an emerging technology, and while they are promised to be secure and reliable, the reality is that researchers are only starting to conceptualize what smart contract vulnerability even looks like (Orcutt, 2018). Researchers identified 3.4% of Ethereum contracts that had known vulnerabilities, and it is believed that there are many more vulnerabilities that have yet to be identified, mainly because they have yet to be exploited.

Nevertheless, smart contracts are one of the biggest growth areas for commercial applications of blockchain technology. With an estimated 32% compound annual growth rate, smart contracts are expected to grow to around $300 million in market size by 2023. There are many companies building smart contract platforms, and the benefits of smart contracts are expected to lead to significant usage by enterprise, in particular as a means of reducing legal costs and legal risk, particularly on relatively straightforward contracts, or when doing business in countries that do not have robust systems of law.
One of the other issues that will likely need to be resolved for smart contracts to become the norm is the problem of time stamps.

In Ethereum, for example, "only the miner who closes the block decides the transaction order", but this means that the participants in the contract do not have control over the order in which tasks associated with the contract are to be conducted, something that is unlike in a paper contract. The miner "can adjust the timestamp provided by a few seconds" (Smartym, 2018). Thus, while a finalized transaction is immutable, the miner has control over specific aspects of the transaction prior to that point, including how fast the contract is executed. This vulnerability will need to be resolved in order to improve the attractiveness of smart contracts – the distributed nature of the contract ledger has to work sooner, so that the miner cannot manipulate performance of the contract.

Risks to Blockchain

Although Blockchain has been touted as being more secure than other transaction mechanisms, it is not without its risks. Indeed, as with the security of smart contracts, the vulnerabilities are still largely unknown, and possibly as yet unexploited. This is actually worse than when you know the risks, because it is much harder to defend against risks of which you are unaware.
Eisenberg (2018) notes that while "blockchain is eons beyond competing database architectures in terms of keeping data secure…but security risks do exist, and they must be recognized and mitigated." Major risks for blockchain include endpoint vulnerabilities, public and private key security, vendor risks, scale risks, lack of standards and regulation, and untested code.
Endpoint vulnerabilities are familiar to any IT tech, and of course they are outside of the blockchain itself, but nevertheless endpoints are a source of vulnerability for the same reason that they always are – they are how humans gain access to the data. This might be a user limitation, but the credentials that are used to access blockchains are more or less as vulnerable as any credentials. If the credentials themselves are not stored safely, then they can fall into the wrong hands, and the security benefits of a blockchain are for naught. Blockchains are accessed via keys, and typically this is a public and a private key. Blockchains are without traditional rights – the holder of the keys is the holder of the data, or cryptocurrency. The keys are typically so long that they cannot be hacked, so instead they are stolen, using a variety of the traditional means by which credentials are stolen, typically exploiting human errors and weakness, or malware designed for common operating systems (Eisenberg, 2018).
Vendors are the second category of risk, because it is third party vendors who are building the applications by which people access blockchains. There are many start-ups focused on creating smart contract applications, for example. These vendors, however, are subject to the same vulnerabilities when building blockchain applications as they are when they build anything outside of the blockchain – bad code, human error, and the security of the systems on which they operate are all critical issues. If security of an application that leverages a blockchain is compromised, all of the information on the blockchain is also compromised, so this is a critical vulnerability and doubtless one that hackers will seek to exploit (Eisenberg, 2018).

Eisenberg (2018) also identified full scale vulnerabilities. Blockchains are an emerging technology. As blockchains grow, there are risks associated with testing the limits of that growth, from the 51% problem to the lack of experience that blockchains have had with things like fraud and hacking. This lack of experience does not mean that distributed ledger technology will not face these issues, and in fact the risk is greater as the reward for attacks is greater.

One of the biggest appeals of cryptocurrency is that it is currency that lies outside of traditional regulatory oversight. This brings with it certain advantages – a lack of traceability being a big one – and with it certain disadvantages as well, in particular that any application that wishes to do business with enterprise is going to need some degree of regulation. For example, smart contracts might be easy to sign and to store, but what about dispute resolution? Many contract disputes are not about what's actually in the contract, but interpreting different terms, and whether or not elements of the contract have actually been fulfilled. So a lack of regulation increases the risk of using distributed ledger technology, and for many applications that regulation needs to be in place before blockchains will truly be trusted.

Untested code is another risk, according to Eisenberg (2018). Again, this risk exists with any code, but the fact that there are only a handful of doors to get into a blockchain means that the known vulnerabilities will be targeted extensively. As more companies get into blockchain technology, there is greater risk that the thin talent pool for blockchain developers will only become thinner. That's when bad code happens, and when it happens it creates an opening for hackers. Peer review of code is often going to be necessary to ensure the security of any blockchain.

These are some of the known risks for blockchains. Most are not specific to blockchains, but are fairly common vulnerabilities that exist across IT. That means that there are many established methods for mitigating those risks, and there are many established methods for exploiting weaknesses. Human weaknesses are going to be the trickiest, because they always are. Private keys are an essential component to the function of any blockchain, but those can easily fall into the wrong hands. How are those private keys being stored? Are they in an Excel file? And if that's on 365, where's the password to 365 stored? In the browser? It's not hard to see how easy it could be to steal a private key. Right now, there is not enough scale and the users of blockchains are fairly sophisticated, knowledgeable early adopters. But as blockchain technology goes mainstream, that will not be the case and the above scenario will play out. Thieves may not know who to target right now but eventually if everybody has multiple private keys, that will create multiple vulnerabilities. Figuring out private key security will be one of the most interesting challenges for the blockchain community.

Managing Networks

Distributed ledger technology could be used to help manage network. Cisco has put forth the idea that distributed ledger's record-keeping functionality can be used to manage "across multiple vendors' devices by keeping a secure record of an appliance's current state and its configuration history. This information can then be updated when something about the device changes, and this would also help to ensure that changes made to a device do not lead to a network outage (Gonsalves, 2017). There are definitely means by which this information can be documented without a distributed ledger, but blockchain might have the most potential for its ability to handle enterprise-level scaling, and because of its high level of security, which outstrips most of the documentation systems on the market today. And where today a centralized controller is essential for managing networks, blockchain can decentralize this function, offering the same efficiency gains that it offers for other types of transactions (Cole, 2017).

In fact, the more blockchain scales the more important it will be to ensure the function and security of the networks that support it. A blockchain can survive the loss of an endpoint, but blockchains do still run on the same physical architecture that traditional applications require, and this creates a need for networks that are reliable, and it creates the need to monitor and repair the health of networks and their components. All told, this probably strengthens the need for ways to monitor networks, and in that respect it is interesting that blockchain might actually provide the solution to this problem.

Enterprise Applications

While contracts and finance are two of the most promising applications for blockchain, proponents of distributed ledger technology argue that it will transform all businesses eventually. There are a few good examples, such as with cloud storage. Right now, cloud storage creates a certain vulnerability because information is stored centrally. While major cloud providers like AWS will have redundancy, not all cloud providers to, and even this redundancy is only one or two other datacenters. The reality is that the distributed ledger creates a lot more redundancy. Data is stored throughout the ledger. It can be stored in bits and pieces. It can then be accessed with the right key. Cloud storage via blockchain offers greater security with respect to accessing the data in the first place, but also the immutable nature is superior to cloud storage in terms of always being able to verify the data that is stored, and even restore to older version of the data should something go wrong. Blockchain for cloud storage seems inefficient in the sense that it will consume more energy than conventional cloud storage, but it also offers certain benefits as well.

The Internet of Things (IoT) is another area where blockchain has promise. IoT poses significant problems for IT departments in part because more devices means more endpoint vulnerability, and more endpoint vulnerability that looks different from conventional endpoints. If, as noted above, blockchains have the potential to improve upon existing network management, then they also represent a pathway to addressing some of the challenges that the IoT poses for networks. Streamlining device management would reduce some of the burden that is currently difficult to address. For example, all traditional network infrastructure can be monitored fairly easily using existing technology, but emerging IoT is much more difficult. Something like a phone can be used to access data, and that might be more difficult to spot than if someone tries to hack into a server. If blockchains make managing networks easier, and more secure, then the technology certainly appears to hold promise for a world in which everybody has dozens of devices with varying levels of connectivity, from a variety of vendors and built on a variety of different hardware and operating systems.

In short, there is a lot of potential for blockchain to contribute on the back end to managing the Internet of Things, but it also might help on the front end as well. One of the issues that the IoT has is syncing, so that data entered on one device is accessible to other devices on the network. Obviously cloud applications address this to some extent, but blockchain can also perform the same function, and do so without the need to subscribe to a SaaS application. For example, in the same way that contracts can be easily signed and logged into a blockchain, data can be as well. There are probably some issues with getting data into and out of a blockchain in a format readable by any application, but the very notion that this can be possible will create opportunity to develop the technology. This is actually one of the pathways to innovation that blockchain promises.

Conclusion

These innovation pathways may not be developed yet, but the idea of the distributed ledger holds a lot of promise, and people have only just started thinking about different ways to leverage this technology. The reality is that distributed ledger technology is something that will underpin a wide variety of different applications. For some things, blockchain holds more promise than for other things, but most experts appear to have consensus that blockchain can and will disrupt a large number of industries. Where intermediaries make money simply for being intermediaries, the peer-to-peer nature of blockchain is clearly an existential threat. The fact that peer-to-peer movement of assets is something that has wide-ranging potential uses is even more powerful.
It will be interesting to see how the blockchain gold rush unfolds in the next few years. Blockchain has enormous potential, but the number of current applications are fairly limited. Major enterprise companies like Oracle and Cisco already have blockchain programs underway, so clearly these will be among the first to take blockchain mainstream, and eventually to enterprise at large.
Contracts look like one of the first uses that will hit the mainstream, but even with smart contracts there are issues that need to be resolved, and even areas where blockchain technology has competitive advantage, such as security, there are unresolved issues as well. So while there is tremendous promise, and a lot of money being put into development, blockchain remains a nascent technology, awaiting applications that can transform it into the powerful business tool that it is promised by many to be.


References

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