What is blockchain and what does it have to do with the Internet of Things?

This year at IFA in Berlin, after dinner, I went to a karaoke bar with two friends, Veena and John, where we met up with their friend Henning. I love karaoke, but am usually shy initially around people who haven’t heard me sing. After I found my nerve, I decided to sing my go-to, Paul Simon’s “50 Ways to Leave Your Lover.”

But given my company, I thought a small modification to the lyrics would earn some laughs, so I went with it—and “50 Ways to Lose Your Ledger” was born.

Over the last year, the blockchain has become one of the hottest technologies you’ve never heard of. If you search for “blockchain,” it’s unlikely you’ll find much coverage in the media before August 2014. You will certainly not find blockchain mentioned outside the context of Bitcoin. Yet within a year, all the venture capitalists are looking to invest in blockchain startups. The banks are all investing, senior finance IT executives are jumping ship to start their own blockchain startups, and even the “high prime minister” of venture capitalist firms Kleiner Perkins wrote about it on 3 September: “Our focus areas: Block chain technology.”

The blog post goes on to say that they track blockchain closely and are excited to see what’s built. In addition, the article states:

“Our leading thesis is this: the most valuable companies being built in this space will use block chains as a deliberate architectural choice in their stack, but in a way that’s invisible to end consumers. As far as consumers are concerned, these will be services that are cheaper, faster, and more secure than ever before.”

So what is blockchain and why is everyone so interested in it? How can organizations monetize it? What does it have to do with the Internet of Things (IoT)?

What is blockchain?

There are many good definitions on the Internet, but I’d use Wikipedia here and define the blockchain as “a distributed database that maintains a continuously growing list of data records that are hardened against tampering and revision, even by operators of the data store’s nodes. The most widely known application of a blockchain is the public ledger of transactions for cryptocurrencies used in Bitcoin. This record is enforced cryptographically and hosted on machines running software."

The emphasized words specifically relate to IoT use case scenarios, which I’ll speak to later on.

Why is everyone so interested in blockchain?

I can’t tell you precisely why everyone is so interested in blockchain, but I can make one reasonable assumption: money. I can also tell you exactly why I’m interested in blockchain.

I first learned about “the block” about 13–14 months ago, when my friend Veena and Paul Brody wrote a seminal executive report on the IoT called “Device democracy: Saving the future of the Internet of Things.”

That title alone was so provocative, I was hooked. Saving the IoT? I thought the IoT was going to take over the world. I read on and was drawn in even further by the first paragraph:

“When the first mainframes were sold, even IBM did not imagine a global market larger than a few thousand devices. Mainframes were the province of the largest governments and enterprises, used to execute complex managerial and operational tasks. Thanks to technological progress that has been both relentless and predictable, mainframes were supplemented first by minicomputers, then microcomputers, personal computers, and most recently, smartphones and tablets. Next up: smart devices.”

Smart devices, now we’re talking. I highly suggest giving this report a read, but in summary it talks about the history of computing, and describes how we now sit at the edge of a massive explosion of connected devices. These devices will open up markets, create massive value and unlock the hidden capacity from the physical world.

But the thesis of this report is that the IoT is in trouble because thus far it appears as though the IoT will be funded through subscription fees and constant advertising—and in a post-Snowden world, end users are hesitant to adopt the IoT for fear of intrusive surveillance. In addition, the report states that an alternative computational and connectivity IoT framework needs to be found because the current hub and spoke model is too expensive, can’t scale to the 50 billion device level, and will likely not be viable for a certain device segment where the value add from making it “smart” is marginal, is less secure and vulnerable to hacks. Those hacks will be attracted to huge volumes of data stored in the cloud, and those hacks will enter through one of the multiple billion end points that comprise the IoT.

The report talks about what is needed in a solution:

Trustless peer-to-peer messaging

Secure distributed data sharing

A robust and scalable form of device coordination

The report submits that blockchain technology may be an elegant solution because it exists on the edge, is “trustless,” is distributed and highly scalable. I’m of the opinion that this is correct; blockchain is indeed a viable solution.

The authors continue:

“A technology breakthrough that has fundamentally changed our notions of centralized authority, the blockchain is a universal digital ledger that functions at the heart of a decentralized financial system such as Bitcoin, and increasingly, many other decentralized systems.

“The blockchain holds a record of every transaction made by every participant. Cryptography is used to verify transactions and keep information on the blockchain private. Many participants verify each transaction, providing highly redundant verification and are rewarded for the computational work required. By confirming transactions using decentralized consensus, the blockchain eliminates the need for trust.”

And finally:

“While the blockchain may carry regulatory and economic risk as long-term store of value (as in the case of Bitcoin), it can be quite revolutionary as a transaction processing tool.

“In our vision of a decentralized IoT, the blockchain is the framework facilitating transaction processing and coordination among interacting devices. Each manages its own roles and behavior, resulting in an‘Internet of Decentralized, Autonomous Things’—and thus the democratization of the digital world.”

How can blockchain be monetized?

This September, the World Economic Forum released a survey report called “Deep Shift – Technology Tipping Points and Societal Impact.” The report addresses many known technology topics: the IoT, connected homes, artificial intelligence, 3-D printing, driverless cars and so on. Two of the 21 topics covered were blockchain-focused: Bitcoin and the Blockchain and Governments and the Blockchain.

Personally, I find this fascinating. Eighteen months ago, the block was intertwined with Bitcoin and was largely ignored as a viable distributed data and messaging framework. Now it’s getting 10 percent of the coverage in the survey study from the World Economic Forum. That’s proof positive of just how fast this technology is moving.

In the study, the claim is made that 10 percent of the global GDP will be stored on blockchain technology by the year 2027. Currently, global GDP is $80 trillion; to put this in context, assuming there’s no growth in the next 12 years, blockchain tech will store one-half of the United States’ annual GDP, or $8 trillion.

This will be accomplished largely through a shift to blockchain-based contracts, improved property records, increased transparency and the elimination of risk associated with relying on others to follow through on their commitments. When you are contractually bound through a blockchain agreement, the contract will self-execute when commitments are met.

What does this all mean in real terms? Here’s a great example. In third-world regions or countries, like the areas in South America that surround the Andes and Amazonia, much of the land ownership is in dispute or unknown. Centuries of unethical real estate dealings, unscrupulous lawyers and black-box insight into land ownership has resulted in hundreds of thousands of square miles in South America where no one can prove who owns what. As a result, banks are unwilling to lend against the property and development is often unviable.

This hub-and-spoke approach to property records means only a small group of people “know” who owns what. In effect, they control ownership because the access to information is limited. They are the trusted owners of information; unfortunately, history tells us that when power is in the hands of the few, abuse of that power soon follows.

By employing the blockchain to improve property records, a totally transparent ledger would be open and available to all. This would remove possibilities of malicious actors interfering with real estate transactions, and would instill confidence in investors, partners and other governments. Landowners would finally be able to borrow against their property while outside investors could feel comfortable committing to projects. In South America alone, this is a $7 trillion opportunity.

What does blockchain have to do with the IoT?

A lot. Maybe not today, but in the near future the blockchain will play a large part in the Internet of Things. Aside from the security approach, and the inclusion of low-value devices, there’s the aspect of managing a device for 10 or 20 years.

The current model is to store a repository of the deployed device population, with a constant update process as devices download new firmware, upgrade their operating systems and deliver patches. You often have to record regional location as part of the device registration process, because variables tied to region (language, power supply, regulation) affect how and what you deploy to the device as part of its ongoing support. This could be solved through the block. The records could be stored on the block, and the upgrades and updates could be stored, validated and executed using the information stored on the block. This decentralized approach will save the manufacturing industry a fortune over the long term.

Lastly, the concept of network traffic is something blockchain would impact. For every transaction, a push-and-pull update must take place that is recorded in the cloud. No matter how trivial, the only repository where transactions are recorded is in a centralized cloud-based data center.

If you scale that to 50 billion devices, all doing what they do every day, you produce an unprecedented amount of network “chatter.” The network wasn’t designed for this. Blockchain may be a way to quiet this chatter and optimize the IoT.

So what do you think? Is blockchain overhyped or is it transformative? Let me know @peter_ryans.

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