Back then, the discussion was almost all about Bitcoin and its regulation. Today, the central theme is the many use cases for the blockchain data structure, whose first variant was introduced with Bitcoin’s 2008 launch.
Today's central insight is that blockchains are essentially a new database structure. They store every change to the database, including both the data itself and who controls the ability to modify that data. Because blockchain-based records cannot be altered, the database may be shared across multiple parties while maintaining integrity. And that database integrity can be automatically audited so trust between parties is more readily generated and maintained through transparency. These capabilities make blockchain-based databases appropriate for shared or distributed ledger applications.
The potential for blockchain technology in general, and distributed ledgers in particular, has even been recognized by central bankers, many of whom are actively assessing the issuance of digital currency tracked on a blockchain. The central banks of Canada, UK, EU, Sweden, China, Singapore, the U.S., Russia and others have investigated the impact of issuing what's referred to as a central-bank-issued cryptocurrency (CBCC).
That's quite a change in perspective.
Today's vision is that there will be many, many blockchains connected by various gateway methods. Meanwhile, Bitcoin itself continues to deliver on its original design. In developing markets and for those with uncertain currencies, Bitcoin is used as a store of value and a currency hedge. But in developed markets, the bitcoin ecosystem is being used by some as a set of low-volume, high-trust payment rails.
Shared database technology
Traditional databases require management by a single entity and, to ensure integrity and accuracy, strong access controls that often limit users to a single enterprise. A blockchain-based ledger, however, can be distributed across many more parties.
The concept of a distributed ledger, an unalterable database of transactions, has stimulated development by major companies and innumerable startups. Open-source projects include Hyperledger, Chain Core and Corda. Major IT suppliers, such as IBM, are active in their support of blockchain-based approaches.
Of particular significance is the participation by many of the world’s largest financial institutions in consortia, such as Chain and R3. Their membership fees support the development of lab and limited tests that, for example, examine the exchange of assets, including stocks, bonds, derivatives and other financial instruments instead of just digital currencies.
The privileges of membership
Access to blockchain-based systems follows two models, permissionless and permissioned blockchains.
Permissionless: Bitcoin itself and other systems like Ethereum exemplify the permissionless model. They are open for anyone to use. These systems run on open-source software. Governance is distributed between the rules coded into the software itself and the developers who maintain and improve that software. There is no central authority or 'Bitcoin, Inc.' The permissionless model makes the systems scalable, mostly reliable, and as is the case with so much of installed IT infrastructure, slow to change.
Permissioned: Permissioned blockchains serve a broader range of purposes. Think of them as shared ledgers put in place to serve a known group of participants for a shared purpose. The R3 consortium is an example.
If the recorded data includes the terms of a contract, software can read those terms and act on them.
In the permissioned world, you must be a member of the system to transact with other parties. With all members vetted by the organizer, this approach has a number of advantages:
- It's optimized for individual use cases. Blockchains can be designed to meet a broad range of functional requirements ranging from high transaction rates to the sharing of peer-to-peer (P2P) transaction data, for example, where exchange rates and know your customer (KYC) information must be shared.
- It means simpler security. A smaller universe of known participants, the permanence of the blockchain's ledger data and audit simplicity lower the effort required to maintain trust among participants. If everyone is known and vetted prior to access being granted, and blockchain attributes are used, more algorithmic options are available to accomplish the system's goals.
The permanence of a transaction recorded on a blockchain lends itself to interesting applications, including what are called smart contracts. If the recorded data includes the terms of a contract, software can read those terms and act on them. For example, an asset transfer may be made automatically based on terms written into a blockchain.
One blockchain use case under examination applies to the challenge of digital identity. It's still hard to know who we are transacting with online. Storing a digital representation of a passport or drivers license credentials on a blockchain could serve as a central source of identity credentials. That may not address the critical function of identity verification, actually verifying the linkage of identity credentials to an individual, but it could prove useful to financial institutions. Indeed, many observers believe financial institutions, given their KYC requirements, are well suited to providing identity services.
The market will begin the long process of determining which use cases are best served by blockchain technology.
What's ahead for 2017
2017 will be the year when a collection of lab-based tests move into limited pilot programs and early production. The market will begin the long process of determining which use cases are best served by blockchain technology. Success will be measured not only on functional merits but on economics, an area with a scant track record. Nor are consortia easy to manage – it is hard to bring together competitors, never mind supply chain partners, into a scheme whose rules benefit everyone. Blockchain technology is just beginning to meet marketplace realities.