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Part of a ZDNet Special Feature: How Blockchain Will Disrupt Business

Blockchain and business: Looking beyond the hype

Large parts of the enterprise may well get retooled using blockchain technology, and new blockchain-based business models may emerge. But don't expect this to happen overnight.

The term blockchain can elicit reactions ranging from a blank stare (from the majority of the general public) to evangelical fervour (from over-enthusiastic early adopters). But most people who know a bit about the technology detect a pungent whiff of hype, leavened with the suspicion that, when the dust settles, it may have a significant role to play as a component of digital transformation.

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The best-known example of blockchain technology in action is the leading cryptocurrency Bitcoin, but there are many more use cases -- think of blockchain as the 'operating system' upon which different 'applications' (such as Bitcoin) can run. So, what is a blockchain?

At heart, a blockchain is a special kind of database in which 'blocks' of sequential and immutable data pertaining to virtual or physical assets are linked via cryptographic hashes and distributed as an ever-growing 'chain' among multiple peer-to-peer 'nodes'. Additions to the blockchain can only be made after validation by a majority of nodes using a consensus mechanism, the two main ones being Proof of Work (PoW) and Proof of Stake (PoS), after which the new blocks are distributed to all nodes. At the moment, PoW is the most common consensus mechanism, the best-known example being Bitcoin mining by solving cryptographic puzzles. However, PoS is less costly in terms of computing resources and electricity, and can deliver faster throughput.

A blockchain is therefore a cryptographically secure distributed ledger in which each node has a verified, up-to-date and immutable history of all transactions that have ever taken place among participants that do not necessarily need to trust one another. Validated transactions cannot be altered or tampered with, and can only be reversed by a subsequent transaction.

There are two broad types of blockchain networks: 'permissionless', which anyone can join; and 'permissioned', in which participants are authenticated by whoever is running it. The latter can be further divided into 'private' and 'community' blockchain networks -- a single enterprise versus a group of companies involved in a particular business process, for example. In permissionless blockchains, like those underpinning Bitcoin or Ethereum, more reliance is placed on consensus mechanisms to confirm identities and validate transactions.

Business rules that govern what happens to assets during transactions are known as smart contracts, which form a link between decentralized applications (or dApps) and the blockchain itself. Ethereum is the leading example of a smart contract-based blockchain system. The linkage of virtual or physical assets to digital tokens is called tokenisation, while the process of raising funds by offering a new cryptocurrency or token in exchange for traditional currency, or an existing cryptocurrency like Bitcoin, is called an Initial Coin Offering or ICO.

Do you need a blockchain?

As a distributed ledger, blockchain can be used to record any transaction, and keep track of any asset and associated payments. Compared to traditional business processes, blockchain can deliver time and cost savings, along with better security -- especially in a permissioned network. But before we go any further, let's consider the general circumstances in which blockchain technology is appropriate.

The key issues here are the number of participants in the business process and the level of mutual trust, as Cisco's Tom Davies has elegantly encapsulated in this flow diagram:

blockchain-applicability-framework.png
Image: redrawn by ZDNet from an original by Tom Davies (Cisco)

Note that in many cases a traditional database is the more appropriate solution. The key question is whether a trusted third party is available or required: if not, the remaining paths lead to the potential use of a blockchain -- be it public, community or private.

Here's how analyst firm Gartner summarises the key characteristics of different kinds of blockchain:

gartner-bc-concepts.png
Image: Gartner

What the analysts say

Gartner
The latest Trend Insight Report from Gartner on Blockchain-Based Transformation sums up the current position succinctly: "While blockchain holds long-term promise in transforming business and society, there is little evidence in short-term reality." The report notes that most executives are focusing on blockchain to improve current business processes and records management, but stresses that there is also significant potential in digital assets and decentralisation. The analyst firm makes three specific predictions:

  • Through 2022, only 10% of enterprises will achieve any radical transformation with the use of blockchain technologies.
  • By 2022, at least one innovative business built on blockchain technology will be worth $10 billion.
  • By 2026, the business value added by blockchain will grow to slightly over $360 billion, then surge to more than $3.1 trillion by 2030.

Gartner characterises the 2018-2021 phase as 'irrational exuberance', which is followed by 'larger focused investments, many successful models' (2022-2026) and 'global large-scale economic value-add' (2027-2030):

gartner-bc-business-value-forecast.png
Image: Gartner

Maximising the potential of blockchain "requires adapting and transforming core models, processes and systems," says Gartner. However, the analyst firm continues, "these systems are literally the last place a business wants change to occur, because of the large risk to operations." As a result, the technology could "take a decade to become significant in business transactions".

IDC
IDC's latest Worldwide Semiannual Blockchain Spending Guide covers Gartner's 'irrational exuberance' phase (up to 2021) and forecasts a compound annual growth rate (CAGR) of 81.2 percent from 2016 with total spending of $9.7 billion in 2021. The biggest blockchain investments -- over 40 percent of worldwide spending -- will be made by the US during this period, followed by Western Europe, China and Asia/Pacific (excluding Japan and China), says IDC. (Note that spending associated with various cryptocurrencies that utilise blockchain, such as Bitcoin, is not included in IDC's spending guide.)

ibc-bc-sector-opportunity.png
Image: IDC

IDC expects the financial sector to lead the way in blockchain spending for 2018 with $754 million, followed by distribution and services ($510m) and manufacturing and resources ($448m). As far as specific use cases are concerned, the analyst firm's leading contenders are cross-border payments & settlements ($242m in 2018), lot lineage/provenance ($202m in 2018) and trade finance & post-trade/transaction settlements ($199m in 2018). The first of these use cases is a hot political topic in the UK as it attempts to negotiate a post-Brexit customs arrangement with the EU. IDC expects this top three to remain the largest spending areas through 2021. Other prominent blockchain use cases cited by the analyst firm are regulatory compliance, asset/goods management and identity management.

"There are a multitude of potential new use cases for blockchain, as transactions and records are the lifeblood of just about every organization. However, we are seeing initial blockchain spending to transform existing highly manual and inefficient processes such as cross-border payments, provenance and post transaction settlements. These are areas of existing pain for many firms, and thus blockchain presents an attractive value proposition," said IDC's Jessica Goepfert, program director, Customer Insights & Analysis in a statement.

Forrester
In Predictions 2018: Be Ready To Face The Realities Behind The Blockchain Hype, Forrester outlines the key 2018 blockchain trends for CIOs, kicking off with a now-familiar note of caution: "Blockchain technology may not possess the miraculous capabilities that press articles and those with software, books, or other agendas to sell have ascribed to it. But the potential is undeniable: Blockchain technology, if implemented appropriately, supports new business and trust models."

Key takeaways from the report are: It's Going To Be Evolution, Not Revolution ("expect steady progress on the technology front to reflect enterprise requirements and a more mature approach to projects"); and Security Takes Center Stage ("we'll see more blockchain-based initiatives around fraud management and identity"..."developers and security pros will pay much greater attention to the security risks posed by interfaces with existing systems, serious software bugs, and potential future risks posed by quantum computing").

Echoing Gartner, Forrester notes that "many blockchain and distributed ledger projects merely seek to improve existing processes", whereas "true innovators are looking much further ahead". CIOs are cautioned to set realistic expectations, understand their use cases and related interdependencies, and to start small, building their blockchain ecosystems early. As far as security is concerned, the advice is to grow blockchain expertise in developer and security teams, and focus on integration options and regulatory compliance.

What the surveys say

Gartner
In Gartner's 2018 CIO Survey just 1 percent of CIOs reported any blockchain adoption and only 8 percent were in short-term planning or active experimentation. Emphasising the immaturity of the blockchain ecosystem, 77 percent of CIOs surveyed said their organisation had no interest in and/or had no action planned to investigate or develop the technology.

gartner-blockchain-survey.png
Image: Gartner

"This year's Gartner CIO Survey provides factual evidence about the massively hyped state of blockchain adoption and deployment," said David Furlonger, vice president and Gartner Fellow in a statement. "It is critical to understand what blockchain is and what it is capable of today, compared to how it will transform companies, industries and society tomorrow," he added.

According to Furlonger, rushed blockchain deployments could result in significant problems of failed innovation, wasted investment, rash decisions and even rejection of a game-changing technology.

Skills shortages and IT culture/structure issues are likely to be major barriers to blockchain adoption. In Gartner's survey, 23 percent of the 293 CIOs that were actively experimenting with or have already deployed blockchain said that it requires the most new skills to implement of any technology area, while 18 percent reported that blockchain skills are the most difficult to find. A further 14 percent said that blockchain requires the greatest change in IT department culture, and 13 percent believed that blockchain implementation required structural changes to the IT department.

Leading the way in blockchain planning and experimentation in Gartner's survey were the telecoms, insurance and financial services sectors.

"While many industries indicate an initial interest in blockchain initiatives, it remains to be seen whether they will accept decentralized, distributed, tokenized networks, or stall as they try to introduce blockchain into legacy value streams and systems," Furlonger said.

IBM
IBM's Forward Together report, subtitled 'Three ways blockchain Explorers chart a new direction', drew on survey responses from 2,965 CxOs gathered in the first quarter of 2017. Those already experimenting with, piloting or implementing blockchains -- 33 percent of the survey population -- were termed 'Explorers', while those not considering the technology were tagged (somewhat dismissively) as 'Passives'.

Unsurprisingly, given the above definition, all of IBM's Explorers expected blockchain to support their enterprise strategies in some way, with increased transactional transparency coming top of the list:

ibmsystems-of-trust.png
Data: IBM / Chart: ZDNet

IBM cites healthcare as a pioneering sector for blockchain adoption, noting its suitability for storing and providing secure access to lifetime patient data. "If every vital sign from a doctor's visit or wearable health device, and records of all medicines taken, illnesses and operations could be securely shared on blockchain, then the quality and coordination of care would be expected to rise and costs to fall," the report claimed.

Another widely held belief expressed in IBM's survey is that blockchain could render the need for trusted intermediaries obsolete, allowing organisations to collaborate and compete in novel ways.

IBM extracts three lessons from its conversations with early-adopting blockchain Explorers, starting with the observation that organizations should identify new opportunities to monetise data and alternative payment models ("Orchestrate economic advantage"). Lesson number two extols the value of industry consortia in promoting business standards so that geographically separate organisations can connect ("Establish a circle of trust"). Finally, the report cautions against a wait-and-see approach to blockchain, noting that the first platforms may shape its future evolution for decades ("Learn fast and keep an open mind").

Underscore VC
Venture capital firm Underscore VC sought the opinions of 'hundreds' of blockchain thought leaders to compile its 2018 Future of Blockchain Survey. Respondents identified more than 30 industries that they consider ripe for 'meaningful disruption' over the next five years. The top 15 were: Financial transactions; Micropayments; Banking; Supply chain; Crowdfunding; Securities trading; Voting; Healthcare; Cloud storage; Virtual property; Real estate transactions; Legal signatory processes; Energy markets; Small business lending; and Government.

The number-one factor accelerating blockchain adoption was decentralised control, while the leading hindrance was lack of scalability -- something that 78 percent of respondents believed will take 3-5 years to solve.

underscore-blockchain-drivers-blockers.png
Image: Underscore VC

Putting blockchain's current state of development into historical perspective, Underscore VC's respondents judged it to be comparable to June 1997 in the dot-com era -- that is, three years before the dot-com bubble burst in March 2000.

Over three-quarters (78%) of respondents believed that overall blockchain adoption will be accelerated by the use of private blockchains in enterprises. However, 69 percent also thought that the current ability of enterprises to implement blockchain technology is very low.

Commenting on this discrepancy, Underscore VC co-founder Michael Skok said: "Building on our 16 years of investing experience, surveys, and understanding the way open source and cloud computing have been adopted, the enterprise has generally been a laggard. We expect the same will be true of blockchain. We believe that the public blockchain will be the area of innovation, and the way that will come about is with startups, and upstarts like Ethereum leading with innovative distributed applications (dApps)."

Gowling WLG
Gowling WLG, a Global 100 legal practice and a founding member of the Blockchain Research Institute (part of The Tapscott Group), canvassed FinTech experts in businesses around the world and conducted in-depth interviews with a panel of experts to compile its 2018 report The Ultimate Disruptor: How Blockchain Is Transforming Financial Services.

A key point made by members of Gowling's expert panel is the distinction between cryptocurrencies and the underlying blockchain/distributed ledger technology (DLT).

For example, regarding criticism of the computing and electricity costs of coin mining, Dean Elwood, CEO at Umony, said: "We are not using blockchain as a currency. We are applying the same technology in a different way -- we have a DLT chain which represents an audit trail which is cryptographically secure and can prove that auditable elements have not been tampered with. The software has become a commodity and is now low cost to manage. For non-currency/mining use cases, computing power required isn't a problem."

Gowling's expert panel identified a wide range of sectors, headed by banking and finance, that could benefit from blockchain and DLT:

gowling-sectors.png
Image: Gowling WLG & BizWord

The Blockchain landscape

As you'd expect with an emerging technology, the blockchain market is a rapidly evolving one. Analyst IDC has compiled a view of the blockchain landscape as it stood at the end of 2017, showing the major players, and outlining the current structure of the market:

idc-blockchain-landscape-diagram.png

Companies listed: Accenture, Amazon, Aquilon Energy Services, BigchainDB, BitVault, Blockchain Global, Blockchain Health Co., BlockCypher, Blockstack, BlockStream, Bloq, Booz Allen Hamilton, Broadridge Software, BTL Group, Cambridge Blockchain, Capgemini, CGI Group, Chronicled, Cisco Systems, Civic Technologies, Cognizant Technology Solutions, Coinbase, Conduent, Cuscal, Deloitte, Digital Asset Holdings, DXC Technology, Earthport, Elliptic Technologies, Ernst & Young, Ethereum, Everledger, Evernym, Factom, GEC, Genpact, Google, GuardTime, Hashed Health, Hewlett Packard Enterprise, Hijro, Hitachi, Hyperledger, IBM, Infosys, Intel, JPMorgan Chase, MasterCard, Microsoft, Monax Industries, Netki, NTT, Oracle, PwC, Red Hat, Ripple Labs, Samsung, SAP, SAS Institute, SecureKey Technologies, ShoCard, Skuchain, Slock.it, Symbiont, Tata Group, The Boston Consulting Group, Thomson Reuters, Tradle, Trunomi, Virtusa, Visa, Wipro

Image: IDC

There are 72 companies listed in total, covering five Tech layers (Identity management, Fabrics & DL platforms, Security, Payments, Smart contracts), four Services categories (Blockchain as a service, Consulting and professional services, Consortiums/industry groups, Compliance), four Industry applications (Natural resources, Financial transactions, Government & health, Supply chain & trade finance), plus Regulators & agencies and Data provenance & notary.

Most companies are involved in more than one market area, and it should come as no surprise that Financial transactions leads the field by some distance:

idc-blockchain-landscape-chart.png
Data: IDC / Chart: ZDNet

Blockchain issues

As all things blockchain-related approach and reach 'peak hype' (see below), the first signs of the inevitable backlash are appearing. Bitcoin has received a lot of negative press recently, for example, which is one reason why Gartner has it as the sole occupant of the 'Trough of disillusionment' in its current blockchain Hype Cycle:

gartner-hype-cycle-blockchain.png
Images: Gartner & ZDNet

Security is widely regarded as a major advantage of blockchain, but there are still significant risks inherent in the technology (as currently implemented), according to the authors of a recent paper entitled A Survey on the Security of Blockchain Systems. Here's a summary of the nine risks identified by Li et al, and their applicability to blockchain '1.0' (cryptocurrencies) and/or '2.0' (smart contracts):

Taxonomy of blockchain risks
Risk Cause Range of Influence
51% vulnerability Consensus mechanism Blockchain 1.0, 2.0
Private key security Public-key encryption scheme
Criminal activity Cryptocurrency application
Double spending Transaction verification mechanism
Transaction privacy leakage Transaction design flaw
Criminal smart contracts Smart contract application Blockchain 2.0
Vulnerabilities in smart contract Program design flaw
Under-optimized smart contract Program writing flaw
Under-priced operations EVM design flaw

The 51% vulnerability refers to the fact that, if a single miner amasses more than 50 percent of the blockchain's hashing power (in a PoW system) or coin ownership (in a PoS system), that miner can manipulate and modify the blockchain information in various ways.

If a blockchain user's private key -- their self-generated and maintained identity and security credential -- is compromised, then their blockchain account can be tampered with.

Some trading platforms allow users to buy and sell products anonymously using Bitcoin, leading to criminal activity such as ransomware, underground markets and money laundering.

Double spending is where the same cryptocurrency is used multiple times for transactions, and is "relatively easy to implement in PoW-based blockchains, because the attacker can exploit the intermediate time between two transactions' initiation and confirmation to quickly launch an attack," say Li et al.

Blockchain systems take measures to protect the transaction privacy of users. But, say Li et al: "Unfortunately the privacy protection measures in blockchain are not very robust." They quote a study which found that actual transaction inputs could be inferred with 80 percent accuracy in the cryptocurrency Monero.

Criminal smart contracts "can facilitate the leakage of confidential information, theft of cryptographic keys, and various real-world crimes (e.g. murder, arson, terrorism etc.)", say Li et al, who describe an example involving password theft.

Smart contracts may have security vulnerabilities caused by program defects, say Li et al, who list a taxonomy of no fewer than 12 types. In one quoted study, 46 percent (8,833 out of 19,366) of Ethereum smart contracts were found to be vulnerable to four kinds of security bug.

User interaction with Ethereum smart contracts is charged by 'gas', which can be exchanged with 'Ether' (Ethereum's cryptocurrency). "Unfortunately, some smart contracts' development and deployment are not adequately optimized," say Li et al. A tool that can auto-discover three gas-costly patterns reported under-optimization in 80 percent of a sample of Ethereum smart contracts.

The 'gas' value of an Ethereum operation is proportional to the computing resources it consumes. However, this can be difficult to estimate, leading to under-priced operations. "For example, some IO-heavy operations' gas values are set too low", say Li et al, "and hence these operations can be executed in quantity in one transaction. In this way, an attacker can initiate a DoS (Denial of Service) attack on Ethereum."

Outlook

It's clear that, in the terminology of Gartner's Hype Cycle, blockchain is approaching the 'At the Peak' stage, characterised by mass media hype and supplier proliferation, with activity beyond early adopters and negative press waiting to usher in the inevitable slide towards the 'Trough of Disillusionment'.

That's not to say that the current noise around blockchain is all hot air -- just that there's a lot of piloting, early adopting, supplier consolidation and VC (or ICO) funding to come before the untenable use cases are weeded out and the long climb up the 'Slope of Enlightenment' begins.

Large parts of the enterprise may well get retooled using more efficient and secure blockchain technology, and new blockchain-based business models may emerge. But don't expect this to happen overnight.

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