Blockchain: Everything You Need to Know

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Take a moment to learn everything you need to know about blockchains, the what, where, why, and how.

The first thing you need to know about blockchain is that it enables the creation of virtual currencies and intelligent contracts. At its core is the concept of a “distributed ledger,” where data on transactions is recorded across a range of specified databases. Every transaction can be tracked and replicated in real time. That’s how the identities of user accounts, even if they are anonymous, can be verified and secured behind advanced cryptography and digital signatures.

The second thing you need to know is that blockchain changes the rules on everything. This isn’t just about digital transformation of the finance industry — it resets what’s possible for all forms of peer-to-peer exchange and enterprise value chains. Billions of dollars are already being invested by the world’s largest enterprises and governments to create a programmable economy.

Take a moment to look over the what, where, why, and how of blockchains. The who? That’s up to you.

The Definition of Blockchain

As you might expect from a new technology, blockchain has conflicting definitions. One of the most compact definitions comes from Deloitte: “Despite its apparent complexity, a blockchain is just another type of database for recording transactions — one that is copied to all the computers in a participating network.”

The blocks are arranged in fixed structures that include a header and the content. The header block contains all the metadata like a time-stamp, reference number, and a link to the previous block. The content block contains a validated list of digital assets and instructional statements. As you can see, encrypted identity information can be handled separately and protected in another database.

When you pull down the latest block, you also gain access to all previous blocks linked together in a chain of database records, giving you an easy way to verify and audit transactions. The more participants there are, the harder it is for hackers to get around all the verifications. That’s one of the primary reasons that the UK government has chosen a blockchain solution to protect the networks and data of nuclear power stations across the country.

Blockchain vs. Bitcoin

Most people know that blockchain has something to do with bitcoin, which often makes them wary of learning any more about it. They know that bitcoin is a software-defined currency preferred by anonymous users possibly doing illegal things.

Bitcoin was the first application of blockchain, introduced in a 2008 white paper called, “Bitcoin: A Peer-to-Peer Electronic Cash System.” The author of the paper was either a developer or a team of developers working under the pseudonym “Satoshi Nakamoto.” Although several people have claimed to be the mysterious author of the piece, nothing has been proven conclusively yet. Blockchain and the distributed ledger were created to record and verify bitcoin transactions, the first of which was later in 2008.

Bitcoin and blockchain came to the attention of many financial professionals in 2013. That’s when the FBI shut down operations at the Silk Road site, which used bitcoins to make payments anonymous for drugs and other illegal activities.

Real-World Applications of Blockchain

Since 2013, blockchain has left bitcoin far behind as more than $1 billion in investment has flowed in to develop the technology. Anonymous virtual currency is just one very limited application of blockchain, and isn’t what IBM had in mind when it launched a test of blockchain this year for more accurate record keeping in its supply chain. IBM joins financial giants like Nasdaq, JPMorgan Chase & Co., and Bank of America Corp., who have already launched their first blockchain projects.

The BI Intelligence Blockchain Report laid out the true potential of blockchain: “[It] has the ability to allow multiple parties to transfer and store sensitive information in a space that’s secure, permanent, anonymous, and easily accessible. That could simplify paper-heavy, expensive, or logistically complicated financial systems, like remittances and cross-border transfers, shareholder management and ownership exchange, and securities trading, to name a few. And outside of finance, governments and the music industry are investigating the technology’s potential to simplify record keeping.”

The report estimated that blockchain could save enterprises $20 billion annually by 2022.

Blockchain for the CIO

Despite all the business interest and investment, perhaps the biggest input still missing from blockchain is imagination. At the Gartner Symposium/ITxpo this year, David Furlonger, Gartner VP, encouraged financial leaders to get creative. “We now have a digital capability to represent any form of value that is privately issued — you can become your own banker, insurance agent, or foreign exchange teller. What does that mean for how society operates today? What are the implications for governance, our tax system, and our legal framework?”

Gartner gave not answers, but reasons to investigate what the technology could do for each individual enterprise, saying, “CIOs should build a list of potential use cases for their own industry to discuss with the CEO.”

The practical uses so far, in addition to those by IBM, the UK government, and banks, include:

  • A channel for universities and educational institutions to provide proof of course completion and grades across continents.

  • A diamond registry that can identify stones by their unique features, such as the stone’s cut, color, clarity, and carat. Diamonds can be tracked from mining location to retail destination.

  • In China, it is being deployed to trace the origin and destination of fresh produce, beef, and milk.

  • In emerging markets where it is difficult to track and verify land ownership, it is used as the backbone of a comprehensive land title system.

The primary skill that any database development team needs to create and maintain its own blockchain application is a strong background in databases and distributed computing.

Blockchain for Developers

The Byte Academy’s Blockchain Bootcamp in New York runs eight weeks and costs around $10,000. That may be a substantial investment for some developers, but compare that with the $220K annual salary that an experienced blockchain developer can command on the market now.

Dave Hoover, co-founder of Dev Bootcamp, projected that blockchain developers will become an essential component of IT teams over the next few years. He said, “To me, it’s a matter of when, because I believe blockchain is fundamentally game-changing technology. It’ll probably happen faster than it happened with the web.”

Here are some resources to get you started:

  • Blockchain University combines online with classroom resources, including bootcamps and hackathons that bring together developers, product managers, attorneys, designers, and builders with entrepreneurs or enterprise intrepreneurs.

  • Ethereum is a new open-source initiative striving to establish a universal set of blockchain protocols with a built-in programming language. It will allow developers to build any application on top of Ethereum, with the rules enforced by the blockchain. There are currently Ethereum implementations built on C++, Go, and Serpent 2.0.

Blockchain for Consumers

One of the most interesting developments with blockchain has emerged in Australia, where alternative energy is changing the way power is delivered. It starts from the aspect of blockchain that simplifies peer-to-peer exchanges.

David Martin, managing director of Australia’s Power Ledger platform demonstrated why blockchain makes more sense in a programmable economy. “The energy system used to be linear  — energy flowed from distant generators to consumers via long networks and was facilitated by wholesale markets and retail agents. The system is more distributed now, and energy flows in multiple directions. Yet we still rely on wholesale markets and retailer intermediaries to operate as they always have.”

Blockchain forms the basis of an energy exchange, which can serve as a model for the home or office-based solar generators in the United States. That’s already being done in Brooklyn, NY, where an independent co-operative microgrid has been set up to allow members to trade power according to what they need.

The Promise and the Peril

Despite all the positive possibilities blockchain opens up for more efficient exchanges, monetary and otherwise, Gartner’s Furlonger also pointed out that, “In its current form, blockchain suffers from significant limitations in scalability, governance, and flexibility.” Scalability is limited by the vast amount of computer and power resources required. Governance remains an open question as private companies pursue their own blockchain initiatives based on many different infrastructures. Finally, flexibility is compromised by lack of integration with corporate legacy systems and policies.

Any distributed application involving the exchange of highly valuable data requires a much higher bar in terms of reliability and performance. Most financial institutions have web and mobile apps these days. To keep up and differentiate from their competition, financial companies need to offer a feature-rich app that gives users an exceptional experience and easy access to their accounts. Solutions like those provided by AppDynamics allow financial institutions to monitor online banking apps, credit processing, claims processing, payment processing, anti-fraud, and improve customer support.