In a recent Interconnection blog, “Blockchain: A new type of internet,” the author describes a distributed, shared public ledger technology as “the backbone of a new type of internet,” that keeps a record of all transactions taking place across a peer-to-peer network. In this Networking for Nerds article, we’ll be describing two forms of blockchain technologies (public and private) and the benefits they could potentially deliver to enterprises in specific industries. Much like the wild, wild West offered undiscovered and unlimited opportunities to pioneers, blockchain is a greenfield for multiple horizontal and vertical players.
What is blockchain technology?
Blockchain, at its core, is merely another form of distributed database technology with special properties, such as:
- Not having a single source of trust (no single super-user/centralized admin). Rather, it is a shared-trust model among peers.
- Its records are not updatable, so transaction records cannot be changed. It is purely an append-only ledger.
- Having a single global logical (virtual) schema that is stored via multiple, distributed physical copies.
You can also think of blockchain as middleware for an application level-network, whose nodes directly correspond to the distributed physical copies of the shared ledger. The distributed blockchain nodes can be owned either by a single blockchain network provider or by each participant/consumer in a particular blockchain network. These owners may also determine whether or not a blockchain network is public or private.
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Public and private blockchains
Public blockchain networks, such as BitCoin for cryptocurrencies, make every transaction record publicly visible to everyone and anyone can participate in the network, and there is not a priori trust among the participants.
Private blockchain networks (also known as permissioned ledgers), that can be constructed using a Hyperledger Fabric, hosted by the Linux Foundation, are permission-based. This is an example of what enterprises are beginning to use internally in their applications.
The major difference between the public and private blockchain is the consensus mechanism. In public blockchain, you do not trust any of the other members, so the amount of computation overhead that is involved in verifying or validating every transaction is quite high and time consuming. Whereas in a private blockchain there’s usually a greater amount of permission-based trust involved, so you can use simpler and faster consensus algorithms. As a result, you can do thousands of transactions per second rather than just a few, as in public blockchain networks. Furthermore, in private blockchains transaction records can be encrypted and are only visible to authorized parties and this, in turn, helps to satisfy the privacy requirements of the participants.
The pyramid of blockchain technologies/platforms
In the open source communities, Hyperledger, R3 (Corda) and Ethereum are the leading blockchain platforms that are expected to drive blockchain-related innovation. They are at the base of the blockchain platform technology “pyramid.”
The majority of horizontal and vertical application platforms that are being developed today by large IT vendors such as IBM, Microsoft, Oracle and SAP are based on these three technologies. Each of these companies have made significant investments into horizontal blockchain platform offerings based on these open source technologies (both as software and as a service) to give legitimacy to this nascent field. This provides the middle layer of the pyramid.
Then at the top of the pyramid, large system integrators/consulting companies (e.g. KPMG, Cognizant, Accenture, etc.) are developing customized solutions for different blockchain verticals. We think that the four main verticals that will be the early adopters of blockchain in order of importance are: supply chain, finance, government and health.
The benefits of blockchain for the enterprise
As mentioned above, enterprises are seriously investigating blockchain technology in verticals such as supply-chain networks, trans-border financial trading, government record keeping and health industries. Here’s why:
- Crypto-Currencies: Crypto-currencies do not have a single administrator or source of trust (e.g. government agency), and transactions are completely public and are not regulated by any government agency. The adoption of crypto-currencies is gaining traction as more large enterprises begin to accept crypto-currencies in lieu of national currencies. One of the benefits of crypto-currency is that you can go to the level of a micro-cent for greater accuracy, not requiring you to round-up or down. However, issues do exist with public blockchain networks for crypto-currencies. Since there is no single source of trust or transaction validation in public blockchains, it is computationally very expensive and slow, and crypto-currency systems have been hacked or crypto-currency exchanges (which convert crypto-currency into national currency) have gone bankrupt. This is why most governments are currently taking a wait-and-see approach to its usage.
- Removing the Middleman: Today, financial transactions that cross country boundaries go through intermediary parties who add extra cost and time delays to each transaction. Furthermore, if these intermediaries’ security is compromised, then the entire system gets compromised. Blockchain with its peer-to-peer networking model obviates the need for an intermediary, and it’s faster, safer and less expensive.
- Developing a Scalable/Real-time Distributed Ledger: Today in many large supply chain networks, various parties maintain their own separate ledgers, and sometimes there are disagreements with respect to the state of the different ledgers. Also these different ledger systems cannot be reconciled in real-time. Blockchain technology, with its single logical copy of the ledger, makes the ledger copies consistent at scale, in real-time across distributed locations.Also, private blockchains between trusted parties can use simple quorum-based transaction validation mechanisms, and thus, can provide high transaction throughput rates. For example, look at the Amazon marketplace – everything is sold is controlled and filtered by Amazon. However, a lot of businesses want that control and don’t want to give it to a third party. A decentralized marketplace, powered by a scalable, real-time distributed ledger is something that a lot of business would like to harness for themselves.
- Unalterable Record Keeping: Many government agencies are interested in keeping track of historical data pertaining to land/property transactions. In addition to be able to examine the history of a particular transaction, they also want to ensure that no one can alter previous historical records. The append-only property of blockchain, along with the inherent distributed nature of blockchain (the presence of multiple distributed copies that are managed by different entities), provides the necessary mechanism for governments to create such an immutable record keeping system.
We anticipate that enterprises will initially complement their existing IT systems with blockchain-based systems, and it will take some time before they’ll change their core IT systems and business processes to fully leverage the benefits of blockchain technology.
The following are some key blockchain-related predictions from analysts looking out to 2020 that give a more balanced view of these trends:
- 20% of the global trade/finance systems will employ blockchain/distributed ledger technologies (IDC Blockchain Report 2017).
- 5% of government entities will employ blockchain for official transparent record keeping purposes (Gartner Blockchain Report 2017).
- 80% of Enterprise blockchain initiatives will not deliver on their stated promises because the use cases were not suitable for leveraging blockchain technologies (Gartner Blockchain Report 2017).
The later prediction speaks to how adopting blockchain is not just integrating the technology into your IT infrastructure, it is about a business changing its internal processes as well. It also requires an organization to understand what blockchain technology can do for its business and the value it could bring, which may take some trial and error over a number of years.
At Equinix, we are closely following blockchain technologies and how they can be best harnessed within our IT operations and business models, as well as those of our customers. In upcoming articles, we’ll discuss how we see blockchain ecosystems forming within Equinix and how we can add value to the solutions and services that our partners and customers are creating.
To learn more about how Equinix can help you build and create digital infrastructure that can prepare your IT organization for whatever comes its way, check out our Digital Leaders eBook.