What’s Possible with Blockchains?

As Product Managers, what we really need to know is what’s possible with Blockchains, and how is it going to shape the future of various products industries and markets.

From a Business perspective, Blockchains can be used as an exchange network to move value, assets , transactions amongst peers on the network without the need for any 3rd party intermediary to validate or maintain these movements. At first this might seem trivial, but let me tell you that moving assets, value and transactions without 3rd party intermediaries is huge. One of the direct benefits is drastically reduced transaction costs.

Add to that the upsides of a fully secure, distributed, never-down network. After ignoring it for a while, the banking industry has now started to take note of how disruptive blockchain powered exchange networks can be to their core business. Most big banks have some sort of blockchain experiment going on as they see blockchain tech as a key part of their competitive advantage going forward.

Internet of Things (IoT) & Blockchain

Another big implication of this technology (and one that I am personally excited about) is that it could really give the much needed boost to the “Internet of Things” future. The future where machines are connected to each other and are communicating seamlessly to get jobs done, with minimum or no human intervention. But how can blockchain help us realize this future ?

dilbert explains it well

The prerequisites for true IoT functionality is not only that machines be connected to the internet as well as to other devices, but also communicate with each other securely and on an as needed basis (due to hardware / battery life constraints). These machines should also be autonomous and smart, in making decisions based on a set of rules that cannot be tampered with. Current manifestations of IoT architectures suffer from poor cybersecurity implementation in applications, networks, data and equipment have made IoT projects very challenging. Blockchains can change all that as they enable connected devices to be smart independent agents, that can not only identify themselves to other machines securely, but also carry out micro-transactions based on a set of rules or smart contracts that cannot be tampered with.

Here is a classic example that can be realized with IoT + blockchains: Imagine a vending machine that can monitor and report its own stock, and accept bids from distributors AND make payments automatically via micro transactions for delivery of new items. Other scenarios such as smart home appliances that can bid with one another for priority so your the laundry machine, dishwasher, thermostat and Roomba all run at an appropriate time while minimizing the cost of electricity against current grid prices.

Several blockchain startups such as Ethereum have realized this opportunity and are already extending blockchain functionality beyond cryptocurrency. Ethereum’s blockchain has its own cryptocurrency called “ether”, but it also provides the capability to write secure and tamper proof smart contracts into the blockchain enabling micro-transactions when specific conditions are met. This has the potential to unlock entirely new business and economic models for various industries in the future. I will explore the Ethereum Blockchain in Part -2 of this series.

Paying for Coffee with Cryptocurrency?

At the time of writing this post, there are over 700 cryptocurrencies being traded on various online exchanges globally, Bitcoin being the most popular amongst these. But, most people don’t use cryptocurrencies to move value around. That is because the infrastructure necessary for such trustless transactions don’t scale well in their current form. Bitcoin transaction processing is restricted (for reasons outside of the scope of this post ) to 7 transactions per second (tps), compare this with Visa processing speeds which has a peak capacity of around 56,000 transactions per second. Bitcoin loses by a lot.

From a cryptocurrency user standpoint here is the UX you can expect today. Say you wanted to pay for your Starbucks using bitcoins. Once you made the payment you will have to wait until your transaction is validated by bitcoin’s blockchain network @ ~7 tps. Your wait times are positively correlated with how many others are paying with bitcoins at that very moment as well as the number of active public nodes validating the transactions, but you could be waiting anywhere from 20 minutes to 2 hours. Your coffee will go cold before your payment is confirmed.

At this time, this is clearly a big limitation for blockchain transaction processing, but a lot of smart people are working to fix these issues, from increasing the transaction block size, to incentivizing nodes to validate blocks quickly. In short, when it comes to cryptocurrency transactions, its fair to say that the future is here — but it doesn’t scale very well at this time.

Public & Private Blockchains

Bitcoin is a cryptocurrency powered by its Public Blockchain, which ensures anonymity in identity but transparency in transactions. However, maintaining both anonymity and transactional transparency comes at a cost — it lowers the bandwidth between nodes and the entire blockchain must be duplicated by all nodes locally to be aware of the current state of the chain. Its replicates into the slow transaction processing that you faced paying for that coffee with bitcoins.

On the other hand an organization or a group of organizations can create Private blockchains if they don’t need or want anonymity of nodes. Private blockchains can be secured by the familiar model of user rights and secrets that we’ve are so comfortable with while still maintaining many kinds of partial guarantees of authenticity and decentralization that blockchains provide. This can work great if the org doesn’t plan on sharing transactions or blockchain writes outside of a closed group, but there is always the chance of that hacker lurking in the wild looking for the weakest link in the chain. One can certainly create private blockchains for testing and experiment purposes as well, we will create one in one of my subsequent posts.

Examples of private blockchains may be “Consortium blockchains” setup by an industry consortium or group where the consensus process of a transaction is controlled by a pre-selected set of nodes. E.g. , one might imagine a consortium of 15 companies in an industry, each of which operates a node in the consortium blockchain and of which 12 must sign every block in order for the transactions in that block to be valid. The consortium or company running a private blockchain can easily, if desired, change the rules of a blockchain, revert transactions etc. Transactions are cheaper and faster as well, since they only need to be verified by a few nodes that can be trusted to have very high processing power, and do not need to be verified by the entire network. So in sum, while private blockchains may not be the right way to create a global cryptocurrency that is anonymous & trust less, they can be used for a lot of other practical applications, including industry specific IoT applications.

Vitalik Buterin, ethereum’s founder puts it in perspective.