Blockchains – from Digital Currency to Physical Things

A sure sign that a once-emerging technology is becoming mainstream is it being given the full front-page treatment by The Economist. This is what happened to “blockchain” technology, the set of cryptographic techniques that underpin Botcoin, the digital currency, when The Economist referred to it as The Next Big Thing. While I am pretty certain that most that esteemed magazine’s readers would never have come across the term blockchain before, the article was not short of hyperbole, equating its invention in the same space as the Internet or limited liability companies.

For those who are not familiar with the concept of a blockchain, there are a number of excellent overviews which can explain its mechanics and application far more eloquently than I can ever hope to. However, just think of it as an ‘unhackable’ ledger or database of who owns bitcoin, managed by a decentralised network, without need for a single authority or trust organisation.

So why have I suddenly taken an interest in the innards of Bitcoin? Well, the use of distributed, hacker-proof ledgers underpinning the currency can have a wide range of applications, from creating fast inter-bank settlement systems to implementing robust, trustworthy notarial records. In a paper called Device Democracyanalysts at IBM compared the Internet of Things to the Internet as we know it, or the ‘Internet of People’. While the open and interoperable nature of the Internet has allowed for a transformation of the way digital content is created, transformed and consumed, A similarly open ‘Internet of Things’ can have an equally transformative impact on interactions involving physical things.

Of course today’s Internet deals with physical assets too – think of hitching an Uber ride, booking an AirBnB room and purchasing some electronics on Amazon. However all these interactions involve a person, always in the role of a purchaser or consumer, sometimes in the role of a supplier. The most utopian vision of the Internet of Things envisions the automation of the exchange of information and value between objects, without necessarily the direct participation of a person in the decision loop. The IBM authors argued that amongst the key limitations of the current Cloud-based services is the inherent cost and lack of scalability of hooking back to a centralised cloud. I don’t quite buy this argument (yet). Social networks such as Twitter and Facebook, operate at fairly colossal scale – with about half a billion tweets sent per day, all quite comfortably off a cloud infrastructure. In my view, the difficulty is that IoT systems consist of a multitude of specialised systems, addressing very different needs such as monitoring aircraft engine performance, scheduling maintenance of elevators and managing levels of crop irrigation. Very few of these services can talk to each other, so the value unlocked is a fraction of its potential. Would Facebook, Twitter, Uber and AirBnB ever have been conceived without the universality of web technology?

An example of the author’s vision can be seen in a project run by IBM and Samsung called ADEPT. This is a proof-of-concept which demonstrates a washing machine capable of ordering new detergent from a supplier when it runs low. Using a bitcoin-type ledger both the owner of the appliance and the supplier can monitor and track all automatic transactions. Certainly interesting, though hardly earth-shattering.

Universal Digital Ledger - Source IBM
Universal Digital Ledger – Source IBM

More recently, and definitely more interestingly, a German start-up called Slock.it is using a next-generation Bitcoin-like platform by a company called Ethereum to implement a system of physical locks linked to smart contracts implemented a blockchain. Here a property is given a Slock which locks the property against a a deposit established by the owner. On paying the deposit through a transaction with the Ethereum blockchain, the property is unlocked. At the end of a rental period, the virtual key is returned to the blockchain, and a payment representing the balance of the deposit less rental is returned to the renter. This is a clear model of how owners of properties, cars etc and would-be-renters can be brought together without the need for centralised agents such as Uber.

Concluding

So what to make of all this? The use of blockchains as a trust mechanism, relying on mathematics for integrity rather than on reputation is very compelling in these post-Snowden days of mistrust, paranoia and deep scepticism of Internet players and government agencies. Moreover the decentralised way by which a blockchain can directly bring together buyers and sellers without need for intermediaries and directly link into physical devices does provide the technology to bring broader disruption than Bitcoin could ever hope for simply as a digital currency.

However, I remain sceptical that blockchains can provide the silver bullet that will unlock billions physical devices to talk to each other seamlessly over the Internet. First, the distributed networks are computationally resource-intensive, requiring legions of nodes to solve the cryptographic problems required to power the system. This strikes me as pretty inefficient and wasteful. For example, the power consumption of Bitcoin network is in the order of 200-300MW.

Secondly, all the ‘Things’ of the world would only be able to come together in the way the Internet brings people together if a truly universal ledger or blockchain is adopted. The best hope for the technology is for pioneering company to gain scale and and exploit the network benefits of being the most popular ledger for ‘Things on the Internet’ in the way Facebook and Twitter gained a seemingly unassailable lead in social networks. Watch this space.

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