by Roger Kay

Blockchain is busting out of its britches

Dec 12, 2016

IBM, others mount a growing list of projects beyond cryptocurrency.

It seems like an eon ago, but it was actually just last March that I added my momentum, via an article in Techonomy, to the growing body of opinion that behind Bitcoin, the cryptocurrency, was a larger, less-well-understood narrative, the story of blockchain, the technology framework Bitcoin was running on. Since then, this viewpoint has been adopted by the mainstream, and hundreds of blockchain applications are in pilot.

Over the past few months, the flood of blockchain announcements has been almost overwhelming, as many companies and industries rush to realize the value of blockchain technology. There’s no real shortcut to understanding blockchain, but the simplest explanation is that it’s a “public” ledger (to those with access, which could be a limited group or anyone), shared and distributed, a single account of things. People can write in it, but they can’t erase anything, and everyone can satisfy themselves that they’re seeing the same version as other authorized parties.

The most useful metaphor I’ve found is this: picture a family of elephants walking through the forest, each holding the tail of the one in front with his or her trunk. The elephants are the blocks and the links between trunk and tail are the chain. The blocks are encrypted records of transactions, and each block has its own integrity. It also passes a record of its integrity to the next block in the chain, and each block has a representation of the integrity of all the prior blocks in the chain and passes these forward to the next block as it’s being built.

Inside each block is one or more encrypted transactions in the order in which they arrived on the network. The transactions could be any text and, technically, not transactions at all. They could be happy-birthday wishes. But for practical reasons, most of them are things like “this person sold that thing for this price to this other person at this time” or “at this time, that person signed for the delivery of this equipment.”   Each transaction contains information agreed to by at least two parties, and, once decrypted, each party involved has access to whatever information they are authorized to see.

So far, we’ve looked at a single blockchain entity, which could be thought of as a computer installation with lots of processing power, storage and networking. But blockchain relies on a world of multiple installations, all computing the same blockchain and checking each other to keep the integrity of the chain on track.

Bitcoin arose from the need to pay for the computing power involved, which despite Google’s advertising model, is not free. Basically, a network operator got paid in Bitcoin if it won the race to compute the next block. The winner advertised to the other networks that it had a time-stamped solution, and they all adopted that new block into their versions of the chain. The race itself was artificial, a puzzle that tested computing power and took a few minutes to solve. The race could be made harder or easier by adjusting a few numbers.

IBM was an early adherent of blockchain as a utility separate from Bitcoin. In fact, IBM steered away from cryptocurrency uses of blockchain entirely. One obvious reason is that Bitcoin runs beyond the control of sovereign governments, offers access to anyone, and is favored by those who wish to circumvent tax or other laws. In other words, Bitcoin is a legal can of worms. The practical business-oriented blockchains that IBM is promoting are designed quite specifically for authorized users only. Bitcoin was also limited in other ways and lacked features that IBM wanted.

Once the cost-of-computing constraint was removed and other features added, blockchain could do much more than create money. All of a sudden, a million use cases presented themselves. Who needs a public ledger that two or more parties can write into and verify but can’t change? A whole lot of people, it turns out. Anyone who wants to exchange something of value with someone outside the trust perimeter, for example the delivery of a machine tool, the acceptance of a stock certificate, or the completion of a scheduled maintenance event. Blockchain ensures that both parties see the same immutable transaction.

All during 2016, IBM stood up blockchain infrastructure, from blockchain example templates to cloud-based development platforms to software contributed to the Linux Foundation’s Hyperledger Project to “garages” in multiple locations around the world where IBM experts could help blockchain developers create new types of blockchains.   Using its Bluemix cloud platform as a service, IBM was able to offer blockchain as a service running on IBM computing infrastructure.

In an early example, IBM helped Japan Exchange Group put together a blockchain for trading and settlement in low liquidity markets. Others followed. BNY created a blockchain for its securities-lending operation. By June, John Wolpert, IBM’s blockchain director, was citing projects in supply chain, letters of credit, bank records, corporate loans, international trade, commercial paper trading and bills of lading.

With IBM’s assistance, a French bank, Crédit Mutuel Arkéa, put together a project to help branches identify customers. In July, Everledger announced that it was setting up a global certification system to track valuable items — such as diamonds, fine art, and luxury goods — through the supply chain.

And the list goes on. There’s neither space nor interest in laying out an exhaustive catalog of all of the projects here.

Banks figure prominently among the types of companies dialing up blockchain instances. Wal-Mart is using blockchain to trace pork products from the Chinese countryside to urban stores, to trace mangoes from Brazil to the United States.

As 2016 drew to a close, IBM disclosed that it had more than 300 active blockchain projects underway in the aforementioned areas as well as in as foreign exchange payments, credit card loyalty program tracking, contract management, trade financing, multiparty trade finance transactions, virtual currency settlements, securities lending, financial audit and compliance, and capital markets infrastructure. To be clear, these are still projects and not full production systems, but the expectation is that some, most or all of them will likely go into production after an initial period of testing.

Of course, IBM is not the only company promoting blockchain technology. Microsoft, for example, is also investing in blockchain, as are Visa and many smaller companies and startups. But IBM is marked by its early and deep commitment to blockchain. In an indication of the size of this bet, IBM’s CEO Ginni Rometty penned an editorial about it in the Wall Street Journal Nov. 7.

Blockchain is likely to become an important technology in multiparty transactional networks over the next few years, and IBM’s bet is likely to pay off. It identified the potential of blockchain early on and has become a key promoter, contributor and provider while at the same time working with the open source community to ensure that the company’s size and market power doesn’t drive away potential partners.