Blockchain: Hype or hope ?

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Blockchain, the technology behind virtual currencies such as Bitcoin and Ethereum, is gaining strong momentum. Within its very short lifetime the currency’s exchange rate experienced heavy fluctuation but increased in value more than fivefold over the past two years. Yet blockchain may prove to be far more valuable than the currency it supports.

The hype behind this novel technology is fueled by the promise of achieving better cost efficiencies and the discovery of attractive new business models. Blockchain may hold the potential to disrupt several industries including the Public Sector, Energy, Healthcare, Manufacturing and particularly Financial Services. But the technology is only as valuable as it is secure. As we begin to explore the new opportunities associated with the use of blockchain, it is important to insure that the initial conditions we are setting up are not causing security issues later on. As many critics begin to scrutinize the security, scalability and sustainability of this novel technology, CxOs seeking to deploy a blockchain ought to consider several questions. This article will offer a fundamental set of these questions, complemented by in-depth discussions of the cybersecurity related impacts of blockchain in the articles that follow.

What is the Blockchain?

The blockchain consists of a decentralized database which stores a registry of transactions across a peer-to-peer network in the absence of a central authority (i.e. banks, governments). In its most basic form it may be regarded as a public registry which keeps track of the ownership, the type of digital asset and its transaction history. In a more practical sense, think of blockchain as an open infrastructure that stores and transfers many different types of digital assets (i.e. Bitcoins). Each blockchain is distributed: it runs on computers provided by volunteers around the world. There is no central authority that might exert influence or a central instance of the database that might be manipulated. Because every participant of the blockchain holds a virtual copy of the transaction and its encryption, blockchain is revered for its security, transparency and visibility. In effect, the technology facilitates a shared reality that can be created across non-trusting entities. Far beyond digital currencies it may be used to securely distribute sensitive information such as certificates, contracts but also real world objects and personal identifiable information.

Should I consider investing?

In my experience, many CIOs are yet unsure about whether to opt-in to this novel technology and make the necessary investment due to the underlying technical complexity and unanswered questions concerning security. A series of fundamental questions, as depicted in the following decision flow, can help to determine if there is a direct benefit in deploying a blockchain:

1. Are multiple parties involved and/or necessary to conduct my business?

2. Are parties involved who have conflicting incentives and/or is there an absence of trust?

3. Is there disconformity in the rules governing the parties?

4. Are the governing rules of the transactions static and/or do not change frequently?

5. Are the business transactions transparent and visible to all parties involved?

6. Is there a need for an unchangeable and objective log?

7. Is there a need for a shared common database?

What it boils down to, in my opinion, is that the benefit of using a blockchain is only apparent if there are many parties involved and there is a high degree of distrust among them. If you do not mind putting someone in charge of a database there is no point using a blockchain, as this would be less efficient. If all questions can, however, be answered with yes then there may be a fertile ground on which to deploy a blockchain. The next step would then be to discuss detailed design options to leverage its potential, to manage associated costs and to cover other implications, e.g. security. The two different forms of blockchains – public and private blockchains – their risks and benefits, are an example of the former and will be the focus of my next article.

Given the costs and uncertainties of blockchains, they are most likely not the answer to every problem. The technology is still in its infancy and many more experiments will have to take place and probably fail before we can begin to fathom all use cases and implications on our economy. In the meantime, please do not hesitate to contact me, for example to discuss your ideas for deploying a blockchain.

Thanks to the co-author: Sebastian Heierhoff.

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