Blockchain: Forget Bitcoin, here comes the real thing

Our publisher-at-large visited IBM in NYC. His first of three reports is on block chain, the bitcoin byproduct that could change everything.

You know that radical ideas are moving into the mainstream when IBM starts selling them. The Big Blue might be a pioneer in its research labs but with global clients in banking and health IBM can’t afford to play silly-buggers.

So it came as surprise to me that IBM is investing in blockchain – the underlying technology beneath Bitcoin. Bitcoin is innovative and exciting but it’s also criticised as a Ponzi scheme, a speculative bubble and for being the chosen currency for gamblers, pirates, drug pushers and child pornographers

Hardly IBM.

And yet, IBM says that “blockchain will fundamentally change the way we do business.”

What gives? And why does it matter to you?

In this Idealog Explainer we discover what blockchain is, why companies like IBM are investing in it and why it’s coming to an industry near you.

What is blockchain?

There are lots of ways to describe blockchain – and lots of videos too. I’ve included two of the best here. 

The easiest way for me to understand it was like this: when a Chinese shoemaker wants to freight a boatload of high-heels to a retailer in Auckland, there are lots of parties that need to agree before the shoemaker gets paid. The shoemaker must contract the shipping company, the shipping company must agree with the port authority, the retailer deals with the customs officials and the retailer must pay the manufacturer. Add all the banks and government officials in between and you can see there’s lots of paperwork. Currently all those agreements are captured by separate contracts and often they rely one or two parties to provide a ‘clearing house’ role.

The same process applies to stock and bond trading, forex dealing, buying a house, buying a car, heck, any agreement that requires multiple parties.

Using blockchain, all those separate agreements can be captured in one ‘smart contract’ that all parties can see, no one can change, is processed in seconds and can stand up in a dispute.

Commentators often describe it as a ‘shared ledger’.

A diagram of it looks like this, with the old world on the left the blockchain model on the right:

What’s a smart contract?

At the core of any blockchain is a smart contract, so-called because its encryption technology allows users to see the same block of agreements but also see in detail only those parts of the agreement that applies to them. For example, the customs official needs to see the arrival dates and contents of the shipment but does not need see the price of the shoes or the exact colours and design.

Why now?

The concept hardly seems new or particularly difficult but three things had to happen:

  1. The Internet needed to be reliable, pervasive and fast enough for documents to be created, processed in real time and shared globally.
  2. Cryptography had to be developed to provide sufficient security and confidence that the agreements would be honoured.
  3. A common standard for everyone to agree on. This is finally underway. Bitcoin is one example, but the largest is the Hyperledger Project by Linux, IBM, Intel and many others. 

Blockchain is kind of like the Internet Protocol for transactions. IBM calls it the “democratisation of infrastructure”.

Why IBM?

Speaking of which, why is the tech giant involved? Well, they’re not the only ones. About US$1 billion went into blockchain venture capital in the last year. And there are many consortia now trying out versions of it. 

James Wallis who heads up IBM Blockchain says that IBM is interested in establishing a standard platform for blockchain to be used in many areas, but particularly finance, trading and in the Internet of Things.

IBM already includes London Stock Exchange and a Finish business development company, Kouvola Innovation, as clients. It’s also opened ‘blockchain garages’ in London, New York, Tokyo and Singapore.  

It recently gave 44,000 lines of code to the Linux Hyperledger project to help developers quickly begin exploring the use of blockchain in the enterprise sector.

“We feel like that in 2016 blockchain is where the Internet was in 1995,” says Wallis.

So what?

So what does this all mean for you? If Wallis’ analogy is true then, then expect to see the following:

  • Disruption of existing structures and intermediaries: clearing, houses and the traditional paper-trails are about to go out of business
  • Potential bigger disruption: the next level of disruption could be start-ups that provide alternatives to exchanges and banks
  • Faster decisions: contracts will be executed faster, so decision-making and the demand for information in real time will step up
  • More analytics: it’s all digitally recorded and stored so blockchain will spit out tons more data
  • Demand for cloud: the processing power required will increased demand for cloud and ‘cognitive’ computing power

If you’re in the business of complex transactions, especially in supply chain or financial transactions, then blockchain is coming to a screen near you.

Vincent Heeringa travelled to IBM, New York, courtesy of IBM