Most technologies touted as “game-changing” are just somewhat modified versions of something already in use. Blockchains are different, and while it will take some time to work out the kinks, they could one day make as much of an impact on the world as the database, smartphone or web browser.
If you’ve heard of bitcoin — and unless the state of the world has forced you to stop following the news, you probably have — you’ve heard of the most widely used implementation of a blockchain. But the technology that makes a blockchain special has a large number of potential uses, and cloud computing companies are starting to make it available to their customers.
“When I (recently) heard that Estonia had basically redone its health care system and put all its national health care records on a blockchain, my ears really picked up,” said Jay Bartot, chief technology officer at Madrona Ventures Labs, who was hired last year by Madrona Venture Group to focus on helping startups explore new technologies.
So, what is the blockchain? Let’s sort it all out.
What exactly are we talking about again?
A blockchain is, well, a chain of blocks. It’s a method for sharing a record of an online transaction in a secure and trustworthy way that allows both parties to have a copy of that record without either party having to maintain that record.
Most digital transactions have a middleman, like a bank that verifies Party A has the funds and has duly transferred them to Party B in a trusted fashion. The blockchain allows you to skip the bank and transfer money, information, or other services directly to another entity over the internet in a method that both parties can trust.
How does that work?
Say you and I are entering into an agreement in which I agree to cook dinner for you once a week in exchange for you cleaning my house once a week, and for some reason we’re both very paranoid that this deal be codified outside the legal system. If we were using the blockchain, you would initiate the conversation by setting up an address on a distributed network that is both public (in that anybody can access that address) and anonymous (in that nobody really knows the identify behind the address), which sounds a lot like email.
But this is where the potential of the blockchain shines: it uses a large network of computers to verify that we both want the transaction to happen and allows it to go through after processing a series of complex algorithms designed to confirm its authenticity. A record of our transaction is then permanently replicated across a network of computers and securely packaged together with other transactions in a block. Any attempt to alter that block — which is publicly available — can only work if all the computers in the network agree that it should be altered, which is all but impossible.
This also means that neither party is responsible for maintaining the record, which is protected by advanced cryptography technology, and can access it instantly. Since it is so widely distributed, it’s always available with no central point of failure, such as a bank or email provider.
And it can’t be duplicated: each new record is unique, and the system verifies that you aren’t trying to pass that transaction off as something else.
Who operates that network?
In the case of bitcoin, the first distributed blockchain, it’s a huge peer-to-peer network of private computers that come together to create the public record.
The creator of bitcoin, Satoshi Nakamoto, had a, shall we say, less-than-favorable opinion of centralized networks, both financial and technological. So, he, she, or they (nobody still knows exactly who or what Nakamoto is, despite the half-baked efforts of Newsweek) created a system that rewards people with bitcoin for using their own computers to do the hashing work needed to create the new blocks, a process called “mining.”
Bitcoin miners essentially donate the computing power required to verify the integrity of the transaction through a complicated process involving advanced cryptographic techniques. As transactions pile up, new blocks are created, and extremely long sequences of letters and numbers are added to each new block that connect it to the blocks that came before, creating a public record. Miners are rewarded for their efforts with new bitcoin or through reduced transaction fees when they want to cash out.
Turns out Central and Eastern Washington are very popular places for hardcore bitcoin miners (who aren’t just running this on a regular old laptop) because of cheap access to electricity thanks to the region’s array of dams and hydropower plants, Madrona’s Bartot said.
Other blockchains that require permission to use (we’ll get into that later) use different reward systems for doing the work required to verify the transactions.
How do people use blockchains?
That first blockchain, bitcoin, has exploded into its own wacky universe that has investors frothing, even to the point where parallel stock markets are being created through initial coin offerings. Your local grocery store probably doesn’t take bitcoin, but someday it might, and you can turn cash into bitcoin at a growing number of special ATMs.
While bitcoin can be both exciting and a little scary, there are lots of other potential applications for blockchain technology in more boring industries like enterprise computing. In Estonia, as Bartot mentioned above, government officials created a system that uses a blockchain to allow citizens to tell who has accessed their digital information, and when.
The legal industry is particularly interested in blockchain technology as a replacement for some of its more archaic rituals, like notarization, said Quinn Dupont, a research associate at the University of Washington who specializes in cybersecurity and cryptography.
These kinds of blockchain applications are a little different from bitcoin because they aren’t open to anyone; they’re closed systems that you need permission to access. That means they rely on other methods than the widely distributed computing network used to authorize bitcoin transactions, mostly by ensuring that everyone involved is motivated to keep things honest since they have a stake in the game, Dupont said.
But cloud computing vendors could easily use their networks to power limited blockchains for customers, such as if a manufacturer wanted to set up a blockchain between itself and its network of suppliers. IBM and Microsoft have been providing such services to some customers for a while, and other cloud vendors are also jumping on the bandwagon.
What does the government think of this?
For now, U.S. regulators seem to be taking a wait-and-see approach to blockchain technology, mostly focused on bitcoin. However, the buzz around ICOs is forcing regulators to watch closely, Dupont said, as a parallel unregulated stock market could prove irresistible to fraudsters.
While Estonia has embraced the blockchain, there are other countries like China that have banned bitcoin yet are very interested in using blockchain technology for something other than cryptocurrency. It’s fair to say authoritarian governments aren’t too keen on untraceable money (unless it’s something they control the network) but can see other effective ways to use this technology.
How will blockchain technology evolve?
We appear to be cresting the “peak of inflated expectations” on the famous Gartner hype cycle when it comes to the blockchain in late 2017, so it’s hard to know right now which proposed applications will stick and which will prove impractical over time. Certainly cryptocurrencies aren’t going anywhere unless there is a massive shift in U.S. government policy, and the vendor-supplier idea of a blockchain being pushed by cloud providers makes sense.
Madrona recently held a brainstorming event called “Blockchain Startup Ideation Workshop,” where Seattle-area geeks learned more about blockchain technologies and put together rough product or business ideas for the tech. The winning team proposed a blockchain for real estate, which would likely speed up and better secure the escrow process involved in purchasing property.
For now, it seems like enterprising techies will set about trying to use the blockchain for just about everything, and there will be a lot of failures along that road.
“If we’re looking at where the future is going to go, most of the successful blockchain stuff is going to be the apps that look a lot like plumbing, or middleware,” UW’s Dupont said.
It’s still not clear where the blockchain will stick, but when Wall Street appears rattled, you know something’s going on.