Blocktonite Guest Blog from Fueled.com

Blockchain is Going to Affect Many Aspects of Our Lives

By Michael Kordvani of Fueled.com

So everyone’s talking about blockchain and Bitcoin. You’ve heard half a story, you don’t really know what it is, but you don’t think it’s anything to do with you. You’re just an ordinary person, you’re not the least bit interested in the latest technologies, you’re no businessman or entrepreneur looking to cash in on the latest online developments. So why would you care about blockchain?

Well you should, because I can promise you, blockchain technologies are going to enhance our lives. It’s going to make a difference in so many ways, probably in ways we haven’t yet even imagined. Right now, blockchain app developers are beavering away to come up with new and innovative ways to use these new technologies.

 

What are the benefits of blockchain for everyday people?

What a lot of people don’t realise, is that advances in blockchain technologies are going to trickle down to everyone who uses the Internet. These days, just about everyone is online, it’s pretty hard to get by without being connected in some way. It’s getting harder and harder to pay a bill, buy something or keep in touch with anyone without being online. So we’re all going to be impacted by the advances of blockchain technologies. But don’t worry, it’s going to be a good thing!

Much higher levels of security

One of the biggest assets of blockchain is the high level of security. The whole point of blockchain is that all data is encrypted and decentralised. This is a huge step forward with regards to security. The more we move our lives online, the more need there is to be kept safe. Whenever something new comes out, be it an online banking app or a new connected household appliance, you can be sure that there are criminals out there looking to exploit it. By using blockchain technology, security levels rise dramatically.

Speedier financial transactions

This high level of security obviously is good for all sorts of purposes, but it’s going to be especially important for highly confidential material such as medical records and financial transactions. If you ever make payments globally, you will certainly benefit, not just from an increased level of security, but also from an increase in speed. Blockchain transactions are fast because they are direct. This could be amazing news for businesses large and small.

Protection of your identity

Identity theft is big business. Fall foul of it, and you can end up in a huge mess. Blockchain can help to protect your identity with encryption. With the encryption of personal ID and personal records such as marriage certificates, the whole system of proving the legitimacy of an individual becomes easier and more reliable.

It’s early days but the future looks interesting

Blockchain technology is the new kid on the block at the moment, but for anyone who looks a little deeper into it, you’ll soon start to realise that this is one of the biggest online developments ever and it’s set to transform the world. It’s well worth keeping an eye on blockchain app development over the coming months and years – there’s set to be a revolution!

 

Fork it up!

A Straight Line

Today’s topic really touches on the way blockchain participants come to consensus on when a set of transactions (a “block”) becomes “truth” and gets essentially cast in concrete as an immutable record on that blockchain.

Think of a blockchain as just that – a more or less straight set of links in a chain, where each link is a “block” of transactions in a given blockchain network (e.g. Bitcoin, Ethereum) and where a consensus of participants in that network (or “nodes” for our purposes here) have come to agreement that: “yeah, that block is valid according to the validation rules of that particular blockchain, so go ahead and forge that link on the chain.

When you Come to a fork in the Road, Take it

However, there are conditions where a blockchain can diverge into two chains going forward.  Broadly speaking there are three types of such forks.

Business As Usual

Sidebar:miner nodes” on a blockchain are incented to identify valid blocks of transactions submitted on their blockchain network and get consensus from a majority of all nodes that “their block” should be the next link on the chain.

Now, the first type of “fork” is perfectly normal – and occurs because two or more mining nodes have solved a puzzle (or performed some other “work”) to get their “block” on the blockchain at virtually the same time, creating 2 or more possible paths that the particular blockchain can take.

Over time (and we’re talking seconds here), one of those “paths” will increase in length as other miners choose one of the “fork paths” and build upon it with subsequent candidate “blocks”.  The shortest fork will eventually be orphaned and forgotten, and processing will proceed on the longest fork. This is why some folks (like merchants accepting Bitcoins) say that if you post a transaction on a blockchain, and the block containing your transaction  has 6 blocks or more built on top of it – you are GOOD – there’s an EXTREMELY low chance that you are on an “orphaned fork”.

Hard Choice

The other two types of forks are known as “hard” and “soft” forks.  In a hard fork, the blockchain software on computers in that blockchain network (“nodes”) is upgraded by at least some of the nodes, such that “old nodes” will judge blocks from the “new nodes” to be invalid.  If the “old nodes” are stubborn and will not upgrade, voila – a fork.  The most famous example of this was the hard fork in the Ethereum blockchain – leading to the new Ethereum fork and “Ethereum Classic” (like Coke and Coke Classic in the ’80s).

Soft Touch

In a “soft fork”, again you have a situation where some nodes have upgraded their blockchain software.  In THIS case, however, one or more of the rules for that particular blockchain have been constricted by the new software (we say that a “soft fork” is backwardly compatible with previous transactions in that blockchain).

Say that the “new nodes” now will validate transactions that are only up to 1 MB in length – whereas under the “old rules” transactions could be 2 MB in length.  The “old nodes” will validate any of the blocks from the “new nodes” – but if those “old nodes” try to MINE their own blocks – they could be rejected.  The issue in all of this: if the “new nodes” who mine blocks are a minority in that blockchain network, then eventually their “new fork” will be orphaned – BECAUSE those “new nodes” are a minority compared to the majority of “old node” miners.

The Good, Bad, and Ugly

So basically blockchain forks are a natural byproduct of the consensus method used, and are also a way to “upgrade” a particular blockchain’s rule.  Both good and bad things can happen – the most notorious “bad thing” was the Ethereum episode mentioned above. On the flip side, a well managed fork can allow a blockchain to evolve and improve without compromising the validity of past transactions.

Private vs. Public and Permissioned vs. Permission-less

 

 

 

 

There are two related concepts regarding the most general types of blockchains:

  1. The idea of a blockchain that is “public” vs. one that is “private” (the “open door” and “passport bearer” photos above),
  2. The notion of a blockchain that is “permissioned” vs. a “non-permissioned” (or “permission-less“) blockchain.

We have seen people conflate items 1 and 2 (e.g. saying a public blockchain is a permission-less blockchain), and we have seen people maintain a subtle distinction between 1 & 2 above.

On this latter point, for people who maintain a distinction between 1 & 2: the concept is that the public/private distinction has to do with user authentication (WHO are you) and the permissioned/permission-less distinction has to do with user authorization (WHAT can you do). Although there doesn’t seem to be (ahem) 100% consensus on exactly what these terms mean, Blocktonite offers the following explanations of these subtle distinctions:

Public vs. Private

 These terms are generally used to describe whether a blockchain is open to literally anyone with an internet connection, symbolized by the open door graphic above, or if access (read, write, or read/write) to a blockchain is controlled by one or more parties. A very real example of a private blockchain are those set/up by consortia of parties with a shared interest in a particular community or marketplace. R3, the consortium of major banking institutions, is a prime example. In the case of “consortia based” blockchains – there are rules for consensus that stray away from the “proof of work” or “proof of state” mechanisms of public blockchains like Bitcoin (e.g. 10 out of 15 consortium members must agree before a transaction is posted to the blockchain).

You could have a private blockchain under the authority & control of one organization, but, frankly – why would you do that? That situation begins to sound like a secured, high performance, database!

Permissioned vs. Non-Permissioned

Generally speaking, we believe it is useful to think of public blockchains as “non-permissioned” (the Bitcoin blockchain would be “exhibit A” in this way) and private blockchains a “permissioned”.

However, we also believe a useful way to think about whether a blockchain is “permissioned” or not – is if there is the presence of some entity/entities who control what kind of transactions a blockchain participant can perform.  Example: perhaps I’m a bank who is “permissioned” to participate in R3, but I’m not allowed to see or initiate certain interbank transfers on the R3 network.  The fact that I need to be cleared to participate in R3 makes it a private blockchain, and the fact that I’m allowed to perform only certain transactions makes R3 a permissioned blockchain.

In the end, this discussion is a matter of semantics – the more important point is to understand blockchain deployment types and design points.

“Blockchain Friendly” Britain

The United Kingdom stands out (along with Dubai, the US, India, Australia and China) as a country aggressively piloting blockchain applications. However, perhaps more than other countries, the British government itself is more engaged in blockchain uses in public sector settings.

You can Bank on the British

Since 2015, the Bank of England (similar to the US Federal Reserve in mission) has been testing blockchain applications to lower costs in inter-bank transfers internal and external to the country.  The UK Department for Work & Pensions has been piloting the use of blockchain to pay benefits to recipients who do not have bank accounts.  The UK Royal Mint is testing blockchain to issue “Royal Mint Gold” a digital representation of real gold (think of a digital token that can be redeemed for gold).

English Gardens for Innovation

In 2016, UK’s Crown Commercial Service agency (akin to the US General Services Administration) awarded a “blockchain-as-a-service” contract to  Credits (a start-up out of Isle of Wight) so that agencies and organizations within UK’s public sector can use blockchain for their own purposes and applications.  The UK government has also funded a “Digital Catapult Centre” in London to incubate start-ups in newer technologies, including blockchain.

The UK’s Financial Conduct Authority (similar to the US’ Securities & Exchange Commission) has included blockchain start-ups in its Regulatory Sandbox (kind of a ‘safe harbor’  that allows companies to test applications in a live environment).

In academe, the University of Surrey is ramping up its research efforts in “Digital Economy & Blockchain”.

British Blockchains Emerging

Activities like those above are helping to cultivate private enterprise in the UK.  London itself is a hotbed of Financial Technology (“fintech”) start-ups and other industry companies developing blockchain applications.

Postscript 7.9.17: The UK is also looking into blockchain technology for it’s judicial system.

What is Blockchain?

If you google the phrase “what is blockchain” you will get (as of 6/3/17) 17 MILLION hits. We at Blocktonite don’t pretend that we can offer you as good an answer to that question as any of those folks. In fact, we’d be lying if we said WE totally get it.  However,  we plan on building over the next few weeks a special section of our library dedicated to the best explanations we’ve found.

Having said that – here’s the way we think about blockchain in terms of “what  is it for?”: it’s a way to allow a “community” who have some kind of shared interest (exchanging money, who has what property, where did a physical, virtual, or intellectual asset come from, and on and on) to agree on the state of that specific world (energy consumption, land ownership, money, etc.).  This sounds dull – but it’s yuge. Take it from us.  The best way to “get it” is to see how industries and countries and governments are thinking of ways to use blockchain (hence our attempt to highlight what’s going on in the areas of music, energy, state regulations, document management, internet of things, etc.).

From an “information technology” perspective, blockchain is an evolving foundational technological standard (meaning ‘raw’ technological plumbing) that can run on the internet. The internet today has literally hundreds of such foundational ‘services’ – most of which you experience but don’t directly interact with.  Examples:  “SMTP” is what your e-mail provider uses, “http” powers all the websites you access, “FTP” is what you are using when you upload/download files from somewhere, etc.  You rarely deal with these services directly – but your PC, Tablet, and mobile phone is using them on your behalf.  Blockchain is rapidly evolving as one of those core “foundational” services.

 

When to use blockchain – and when not to

The Bank of Canada (BOC) recently announced that, after a year long experiment, it would not deploy blockchain to settle inter bank transfers. BOC and a number of financial and “fintech” partners had launched Project Jasper in 2013. BOC found that the benefits of blockchain could not outweigh the advantages of the existing centralized approach. BOC clears about $130 Billion US$ a day through Canada’s inter bank transfer system. BOC and it’s Jasper collaborators found that, although they could address issues related to transaction privacy, they could only do so at the expense of system throughput and scalability and not without leaving the entire system open to a single point of failure (which, ironically, is exactly one of the reasons you might deploy blockchain in the first place).  BOC notes, however, that a) in 3-5 years blockchain will have evolved to the point that the “Jasper issues” are addressed and b) that there are other applications for blockchain that BOC will work on in the immediate future.

But the general, and evolving, issue is this: when do you face a situation where a blockchain approach may be advantageous? IBM suggests you consider these questions:

  1. Do you have a community of business organizations external to your own – with a shared interest in process and data?
  2. Is there a need for that community to come to consensus on individual business transactions?
  3. Do you need a way to trace data (or an asset tied to the data) back to its creation? (so-called “data provenance”).
  4. Do historical transaction records need to be unchangeable? (aka “immutable”).
  5. Is “finality” important? (is there a need to have a “single source of truth” about the state of the data on the blockchain?

The Bank of Canada “inter bank project” (Jasper), met all of the five requirements above.  This is why Blocktonite would add a SIXTH criterion to the above:

Can blockchain technology as it exists today (or in the intermediate future) deliver the performance and security you will require for your application?

Blockchain and the Internet of Things (IOT)

It’s pretty much a done deal that there will be an incredible number of ‘smart’ (aka “internet of things” or IOT) devices connected through the internet in short order. For example, Cisco predicts there will be 50 BILLION such interconnected devices by 2020.  However, there are serious questions of security, privacy, data integrity, and scalability associated with this growth.

Enter blockchain, which offers several attractive characteristics that could securely enable the parabolic growth in IOT devices. The Bitcoin blockchain doesn’t quite fit the bill here – but blockchain technologies such as Ethereum and Hyperledger, with their built-in support for “smart contracts” (distributed code that executes when defined conditions are met), seem quite promising.

The potential applications of IOT and blockchain seem limitless. Appliances that sense they need repair and contact maintenance -and even schedule a repairman visit, pharmaceuticals equipped with NFC (Near Field Communications – the kind you see used for Apple Pay) tracked throughout the supply chain from ingredients to consumer, the aggregation of individual pollution monitoring IOT devices for accurate detection of air quality. The IOT/Blockchain combination could power the “prosumer” movement (for example: I’m not using my car for a few days – maybe someone out there wants to rent it).  An MIT research paper discusses how smart drones could use the blockchain to decide what to do as a group, and IBM is developing Watson (AI) IOT platforms (both shades of SkyNet)!

A lot of collaborative work remains to be done – but there are already several consortiums plowing ahead.

 

Here is additional information on new technologies being used for health improvements.

Initial Coin Offerings (ICOs)

NOTE: see Postscript at bottom for update on 6.4.17.

Increasingly over the past 2 years, several start-up companies are obtaining capital via something known as an ICO (Initial Coin Offering). ICO’s essentially combine crowd-sourcing with blockchain technology. Here’s how an ICO works:  suppose a start-up (say ACME Blockbuster) wants to raise money for development of it’s product or service (whatever that happens to be).  ACME can short-circuit the long, arduous task of getting funds from Venture Capitalists by simply announcing that in – say 30 days –  it will issue “coins” to the public at an initial offering price of $X dollars or $Y Bitcoin. ACME offers some information about what it plans to do with the funds raised usually via a “white paper” on its website, and also gives other details such as how many ACME coins the company plans to offer to the public and how many coins ACME will retain.  But one key point: this is basically an initial public offering without virtually any government oversight – including none of the normal SEC filings an IPO would  entail.

The “ACME coins” are really tokens on a blockchain (e.g. Ethereum, Bitcoin). In our example, the investors would buy ACME tokens using fiat money (e.g. US dollars) or crypto-currency (e.g. Ethereum Ether, Bitcoins) at ACME’s initial offering price.  The “ICO industry” already has some service companies sprouting up – such as ICOO, to improve the liquidity of these tokens.

Now, your “ACME tokens” are kind of like shares in a company – but it is a little hazy as to what your ‘token holder’ rights are.  You are basically in the game to speculate: if ACME starts getting results in whatever product/service it is offering- the tokens will fetch higher dollar or Bitcoin prices.  But don’t expect “stockolder meetings” or SEC filings or anything like that. Interestingly, however, there is an ICO ratings organization already in place.

You can raise a lot of money very fast using an ICO.  Digital Capital raised $10M in six hours. 2016 blockchain startups Monero and NEM both had 2,000% increases in value.

There are already exotic variations on above well beyond Blocktonite’s expertise – and, as with the rest of the blockchain world, things are happening incredibly fast.

 

 

 POSTSCRIPT 6.4.17: a couple of recent articles in the Financial Times are must read items prior to investing in any ICO’s or “distributed autonomous organizations (DAOs: which FT likens to automated Ponzi schemes).  Bottom line: unless you are one of the few people that really understand both blockchain technology at an organic level – and the contracts these ICO’s are pro-offering, (or you have money to burn) – stay away!

Supply Chains and Blockchain

 

 

There are a growing number of companies and organizations experimenting with the application of blockchains to several types of supply chains. At least on paper, blockchain is a perfect fit for the process of tracking raw materials, through manufacturing, distribution, purchase, consumption and use by customers – along with all the logistics in between these steps.

By having the particular suppliers, transportation companies, import/export and other government agencies, distributors, wholesalers and retailers who participate in any given supply chain on a blockchain – it becomes far easier to a) ensure invoices are accurate, b) trace foods back to the source (e.g. to limit health risks – and prevent deaths like those from a 2012 episode of e-coli infected spinach), c) authenticate the resources in goods (e.g. ensure the absence of “blood diamonds” in jewelry), and d) lower the “frictional cost” of erroneous paperwork (bills of lading, manifests, etc.).

If there’s one company at the center of applying blockchain technology to supply chain integrity – it’s IBM.  IBM is testing ‘blockchain powered supply chains’ out with WalMart (tracking Chinese pork from source to consumer), Maersk (replacing the mountains of paperwork as goods get shipped across land, sea, ports and borders),IBM’s own Global Finance division (payment dispute resolution), Heija (Chinese supply chain management company), and several other projects.  In addition, there are several start-ups focused on supply chain blockchains – including Provenance, Consensys, and Everledger.