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A brief on blockchain
In 2008 an anonymous individual or group, identified as Satoshi Nakamoto, launched the world’s first cryptocurrency, Bitcoin. Built on a new technical architecture called blockchain, Bitcoin was a new, “peer-to-peer electronic cash system”. It wasn’t long, however, before people began exploring the potential of the underlying technology itself. In time, blockchain became recognized as an effective method of maintaining a static digital ledger, which could be accessed simultaneously by an unlimited number of users. The use of blockchain as a method of ledger management is growing exponentially, but publicly it is often viewed with a mixture of suspicion and wariness, or even as something that came and then went. Blockchain is still very much an emerging technology.
Blockchain’s distributed ledger technology
Distributed ledger technology is a digital method of record-keeping, where users can continuously update a ledger, which is visible and accessible to all other users. A key feature of blockchain is the fact that records are immutable. Unlike other data storage options, data is not stored on a server, but on multiple different devices. In a public blockchain, everyone with access to the digital ledger can see entries made by other users, meaning there is no single administrator who determines how the entire system works. The higher the number of users (or “nodes”), the more secure the ledger, as only with the consensus of the majority can the network be controlled.
So why is blockchain still an immature technology?
- Age: Traditional databases have existed since 1960, but blockchain only entered the public consciousness in the last decade. The technology itself and the use cases to which it can be applied are still developing. Cryptocurrencies, the best-known implementation of blockchain, are well documented, but there is still debate about their validity and they have suffered reputational challenges caused by the lack of regulation and fraud. This has led to mistrust, caution, and public detraction. Meanwhile, widespread adoption among enterprises is only just beginning. Even three years ago, in 2017, only 25% of organisations were even experimenting with it.
- Lack of understanding: This is rife. Many still confuse blockchain and bitcoin, for example, and there are simply not enough data points to give many observers comfort. Even the most bullish cryptocurrency investor may wonder how the sector will survive its first global recession, and companies around the world are still experimenting with different enterprise use cases, with no significant examples yet truly mainstream. However, just as database technologies and more recently cloud have become omnipresent, many believe that blockchain will soon follow suit. Enterprise adoption is accelerating quickly, and multiple surveys show that support for, and dependence on, the technology is increasing rapidly.
- Lack of information and experts: With blockchain being such a new technology, very few people could legitimately be considered experts in the field. There is a shortage of experience and expertise, to the extent that many of today’s leading blockchain companies are inventing things as they go. With this dearth of knowledge comes uncertainty. More worrying than how little is known about blockchain, perhaps, is how much is unknown. Where are the gaps? What are the security concerns? Often it is left to the pioneers to innovate new use cases, invent processes, and demonstrate value through trial and error. Compounding this issue is the lack of available talent. Even organisations that are committed to this kind of innovation may struggle to execute, due to a lack of experienced professionals from which to recruit support.
- Lack of regulatory clarity and governance: Jurisdictional regulation is a key problem for blockchain applications, not least because nodes on the network can be located anywhere in the world. This can create data sovereignty issues and make it difficult to take action in cases of wrongdoing. Innovation will always precede regulation, which means that regulators are forever racing to keep pace with new ways of doing things. In the intervening months, it is not unusual to see bad actors taking advantage. Between 2015 and 2018, thousands of new cryptocurrencies appeared, funded by a new fundraising mechanism called “initial coin offerings” (ICOs). In many cases, these were fuelled by hype. Early investors would buy-in, use their influence to create excitement around their token of choice, then sell to less educated investors, who tried to get in on the action (known as “pumping and dumping”). Some jurisdictions, like the USA, were quick to shut this down. Others less so. Fortunes were made and lost. Founders were celebrated; others jailed. When it comes to enterprise blockchain, regulatory challenges look different. Most established businesses avoided the highs, lows, and legal issues associated with ICOs. Instead, they are sometimes impacted by a lack of consistency between different countries’ legal frameworks. To illustrate this point, blockchain applications are appearing in all manner of cross-border implementations – supply chain digitisation, trade finance, cross-border payments, and more. Yet with no standardised legal position on issues like digital signatures, certificates of origin, or electronic bills of lading, it is impossible to digitise processes end to end. In some cases, transactions are carried out electronically for the most part, only for certain documents to be printed for certain processes that require physical documents, such as passage through many ports. Until there is universal acceptance of digitisation, this will continue to be the case, and the advantages of certain blockchain applications will be impeded. This is not a showstopper, but it is an obstacle.
- Interoperability, performance, and scalability: The inability to integrate blockchain with other technologies, particularly other blockchains, is widely viewed as being a key challenge to its successful adoption. Designed initially as a stand-alone, decentralised technology, it was not developed with integration in mind. Different blockchain applications share commonalities, but also have unique characteristics that can make interoperability impossible. This is a key topic of discussion among blockchain boffins, but as yet there is no solution. What may be required is a universally accepted framework, providing common rules and governance around how blockchains behave, how they manage identities and many more critical issues. Until then, there is reticence within businesses, the finance community, and governments, who are holding back from picking sides. Nobody wants to choose the wrong consortium, or join a platform that later becomes redundant. Alongside interoperability are other concerns, like security (as already mentioned), performance, and scalability. The blocks within a typical ledger are limited in size, meaning they can handle only a limited amount of data and transactions. Progress is constantly being made in this area. In some industries, like the relatively slow-moving world of cross-border trade, performance is less important. In others it is fundamental. With performance issues can come a lack of scalability, and if a platform cannot scale, it cannot become ubiquitous.
Only when these challenges are addressed and more successful implementations of blockchain appear, will the wider community accept that blockchain is well and truly here to stay.