rostige Eisenkette

BLOCKCHAIN – THE BIG WAIT FOR TRUST

The finance industry, especially the established banks are living in constant expectations to be disrupted by tech savvy entrepreneurs. Next to artificial intelligence and the broader field of digitalization, Blockchain is among the top emerging technologies that such a disruption might be based on. Established business models get challenged, the thirst for innovation is still raising. Hence startups get bought off the market as soon as their business cases contains a (prominent enough) reference to Blockchain and possibly a chance to bank the yet unbanked in less developed countries.

Aside the fintech industry, the hype has arrived as well, although not accompanied by the same level of fear: Estonia is basing its complete health care system on an e-government Blockchain, Maersk transferred the bill of lading for their containers into a prototype Blockchain solution  (see: video) and the MIT in Boston is currently working on a Blockchain based approach for issuing certificates. What they all have in common is the commoditization of trust. Maintaining trust amongst the different parties of our societies and economies is as of today either very expensive or very risky – often both.

So what is trust? In its essence it is a non-objective feeling towards the good nature of actions, statements, organizations or specific people. The core of what we mean, when we claim to trust is rooted in our believes that no harm will follow or at least no precautions have to be put in place to mitigate potential harm from accepting a specific truth. In our world, pure trust is very rare. In any economic setting pure trust is considered naive, if not negligent. But without trust, no transaction can ever be executed. Any economy would simply come to a grinding halt and our societies would evaporate. The solution is to ensure an adequate level of trust. To achieve that, governments, enterprises and individuals all over the world apply risk-management metrics that manifest themselves e.g. in contract law and governance practices. The sole purpose is, to limit the damaging outcome that might evolve from entrusting the wrong entities.

Blockchain promises to solve this trust dilemma at its core. Blockchain turns trust into a commodity – but how does Blockchain work? Blockchain provides a distributed data storage mechanism with a built-in protection against manipulation (integrity). Information is stored in a shared ledger in form of transactions. To ensure the integrity of these transactions, several transactions are bundled together in blocks. Using hash functions, a unique (enough) identity value per block is created. This so called hash value is included in the following block. For the following block, the calculation of its hash value includes its transactions as well as the hash value from the previous block as input.

Hash functions have different qualities. One is that a hash value is different for every particular input (collusion free). Another: from a given hash value itself, it is impossible to identify which input was used to create it (non-reversible). While both qualities do not hold completely in theory, for the world we are currently live in (and probably several decades from now as well) they can be looked at as givens. With including the hash values of the predecessors in a new block, we include the truth about the whole chain history.

The second important element to ensure trust is the distribution of the Blockchain over many instances. One Blockchain usually exists in forms of many copies, stored on different servers, in different jurisdictions, potentially all over the world. A consensus algorithm takes care, that only the same valid blocks are getting attached to every single instance of a Blockchain.

It is the linking of the blocks, using their respective hash values in combination with the distribution of the whole Blockchain, that secures the integrity: Any manipulation of an earlier transaction will lead to changing hash values in a certain instance/copy of the Blockchain and hence be very visible for any stakeholder.

The Blockchain is very much available as an experimental technology today. Gartner puts it in its hype cycle 2017 already way beyond the peak of inflated expectations, meaning hopes and dreams with regards to Blockchain are about to be challenged by reality, until – after leaving the disillusionment phase – a more broadly distributed usage comes into reach. Overall, the technology parts of a Blockchain are nothing new, a few especially designed programming languages aside.

The missing trigger for the Blockchain to gain more traction is not within its own technological core. It is much like the internet and e-commerce in the 1990ies rather the business models and their impact on our daily lives that will determine the success or failure of Blockchain. The potential is there – imagine a world where trust is ubiquitous. Where no middle men are needed, to manually maintain the trust in form of (digital) paper trails. Entities would be able to base their business decisions on a shared understanding of facts.

And this might be the biggest chance as well as one of the biggest hurdles to be overcome for Blockchain solutions: They rarely provide enough sense and value if only looked at within the isolated scope of an individual company. Trust involves several parties and while maintaining trust within a company can be challenging, there are usually established mechanisms and technology in place to solve that. It is the trust between the players of an industry and beyond that promises the most value. That wider spread trust can be achieved. It has to be initially created though. And that will most likely not be a task for any individual player: For a whole industry to accept a Blockchain in its middle, it has to be designed and setup from a general trustworthy entity. Industry alliances or partnerships might be able to fulfill that role as of today. Later on startups with an adequate multi-sided platform approaches and enough disruptive potential might be able to scale up a solution beyond what we can imagine today.

Another chance for Blockchain based solutions are IoT Platforms. Gartner sees them moving from innovation triggers in 2016 to entering the peak of inflated expectations phase in its 2017 Hype Cycle. Gartner places IoT Platforms in a less mature state than Blockchain. Nevertheless, they will be playing an important role for the success of Blockchains. With IoT, for many scenarios the initial “upload” of trust into the Blockchain will be automated: IoT-Sensors that deliver their data directly into a Blockchain are less prone to manipulation compared to more manual approaches and hence the basis for trust is improved.

Overall with Blockchain, many answers to open questions are not in sight and the majority of relevant questions is probably not even asked yet. It is worth though, searching for these answers and gain a basic understanding on the potential impact within your specific industry and line of business. It might change its color and shape a few times on its way but in the end, I am convinced we will have a significant positive impact in our business as well as personal lives.

 

P. S: For those of you who want to dive deeper into the trust question, Blockchain tackles essentially the Byzantine Generals Problem.

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