The blockchain technology market is projected to see a 61.5 percent compound annual growth rate through 2021 according to MarketWatch. And we’re seeing companies from across the spectrum — from finance, logistics, and manufacturing to research, computing, and insurance — looking to roll out blockchain projects. But what, exactly, is the appeal of this technology?
In general, there seem to be three driving factors:
1. Gartner’s prophesied digital mesh — the increased blending of people, devices, content, and services — grows more corporeal daily. The way people interact with businesses is evolving, as is the way businesses interact with each other. This blurring of traditional modes of communication and exchange is driven by digitalization and necessitates new business processes and models to cope with an increasingly connected world. Blockchain technology addresses these changes.
2. The new business models required to support this digital mesh are increasingly being built around decentralized networks. Third-party intermediaries and old B2B exchanges that reduce speed and agility don’t apply anymore. We’ve been consistently moving away from central clearinghouses, as partnerships and collaborative engagements at every level become more direct and peer-to-peer. Blockchain technology addresses these changes.
3. Peer-to-peer transactions still require security. There is a need for new technical capabilities to support security and integrity for decentralized networks, and to do so persistently. Blockchain technology addresses these changes.
The blockchain model
If you’re not already familiar with the blockchain model, this section’s for you. Broadly, blockchain works by consensus and may optionally include smart contracts (code within the network). There is no central authority or data store, and the chain is distributed across a peer-to-peer network of nodes and participants. During processing, transactions are added to a “block.” The block is replicated to all the participants that need to validate the transactions. The validated block is then added to the “chain.” The chain is key to the system’s value. Any block will contain a reference to its preceding block via a cryptographic hash. If anyone surreptitiously manipulates the content in a block, that hash will no longer be valid. This creates a kind of append-only data structure and tamper-proof audit log. In many ways, blockchain may be thought of as a decentralized data management platform and asynchronous, global publishing layer that provides:
- A distributed system of record. An immutable distributed ledger that lets you store and distribute information and manage peer-to-peer transactions amongst your decentralized network.
- Smart contracts. Organizations want to be able to automate processes between themselves — the generation, receipt, and exchange of transactions. Blockchain smart contracts execute business logic against transactions that can be executed “on-chain” automatically by participants. No central coordinator is required, and the code is run in parallel, reducing risk and increasing efficiency.
- Security and consensus. One of the most compelling aspects of the blockchain model is its inherent security. Because there is no central database to protect, there is no central database to attack. Blockchains can be structured against different contribution and access rights within a distributed network. For example, there are permissioned (or private) blockchains, wherein contributions to the system are restricted to specific actors and participants are highly trusted; and permissionless (or public) blockchains, wherein anyone can join and participate in the process of block verification and participants are anonymous and vastly dispersed. There is also a middle path, referred to as a “consortium” network, which typically is a private network operated by a group instead of a single organization.
Blockchains don’t work for all use cases
There are many use cases for blockchain in the enterprise: securely managing product provenance (the journey of an asset from raw material to manufactured goods), consumer contracts (insurance claims, real-estate transactions, utilities), and transaction exchanges (financial, health, energy, government). But blockchain isn’t appropriate for everything.
For some blockchain applications, significant questions still need to be resolved, including:
- How to get data in/out of the blockchain
- How to extend smart contract logic “off-chain”
- How to respond to events inside/outside the blockchain
- How to analyze data contained in the blockchain
- How to control and manage access to the blockchain
In short, there are bidirectional interactions and integration points between enterprise systems and a blockchain to consider. A map of which might look like this:
When you need a blockchain — and when you don’t
Tools and technologies are emerging and being extended to help introduce blockchain into a larger operational fold. But even with an appropriate integration strategy, not every problem requires a blockchain! Here are some issues to consider:
- Number of participants in a network (if it’s only two parties, there’s probably not much benefit to a blockchain)
- Required trust and integrity levels
- Amount of data storage (blockchain is generally not geared for storing large amounts of data, since every node across the distributed network often has an identical copy of the blockchain)
- Performance requirements and transaction processing times. Speed is a serious handicap — most blockchain stacks are not appropriate for any task or transaction with real-time requirements, given the nature of blockchain processing, validation, and consensus (e.g. bitcoin currently has a block time of about 10 minutes).
While it isn’t magic and it doesn’t suit every use case, blockchain does present an interesting model for trusted exchange and collaboration in our increasingly networked and digitized world. The only sure way to determine if it is applicable to your organization’s needs is to experiment with it yourself.
Nelson Petracek is CTO of the Strategic Enablement Group at TIBCO Software.