The CIO’s Guide to Blockchain

Ray Valdes

If you’re a CIO, blockchain probably crossed your radar screen a few years ago with news of Bitcoin and how its distributed ledger technology enabled 'anonymous' transactions by nefarious entities around the globe.

If you aren’t in financial services, you might have given the innovative distributed ledger platform little attention. Today, blockchain hype has gained visibility in mass media as consultants and vendors promise to help your company leverage this technology for digital transformation.

Since August, 2015, Gartner client inquiries on blockchain and related topics have quadrupled. Gartner clients in industries beyond financial services are asking whether it is too late to join in the contagion of ‘blockchain fever’ that has struck the financial services sector. If anything, it is too early.

Yet, it’s important for CIOs to understand the possibilities and limitations of blockchain and associated distributed ledger technologies and future business and technology scenarios for their industries in what is increasingly a programmable economy.

Blockchain 101

An explanation of blockchain begins with Bitcoin, since it is the first implementation of distributed ledger technology. As a digital currency, bitcoin compensates for the lack of a physical coin by tracing the history of each transaction and logging that history each time a coin is transferred from one person to another. Each bitcoin trade makes available the full history of that bitcoin, in a chain of blocks, in what is called the blockchain (a form of distributed ledger).

In order for entries in the blockchain to be trustworthy and secure, Bitcoin relies on significant computational power and interested parties or 'miners' to validate and confirm transactions, using a structured process for adding transactions records to the blockchain in return for monetary reward.

This incentive structure is inherent to the Bitcoin blockchain and one cannot use the blockchain without taking into account the role played by the bitcoin cryptocurrency token (the reward). This formula, however, has its limitations.

Ray Valdes

Blockchain’s promise and peril

The magic of blockchain lies in the innovative use of existing technologies to allow untrusted parties, independent of a central authority, to undertake transactions. However, in its current form, blockchain suffers from significant limitations in scalability, governance and flexibility. As CIOs explore the use cases for blockchain and distributed ledgers, it is important to understand the following limitations:

Scalability: In the blockchain, the system requires significant computational power (hence, electricity) to verify and confirm each block of transactions. Due to the design of this process, a maximum of seven transactions per second can take place and each block of transactions requires a minimum delay of 10 minutes to confirm.

Lack of resistance to centralization: As the need for computational power to verify transactions has increased, proof-of-work activity has been mostly consolidated into four primary mining organizations, all based in China. This alters the conception of blockchain as a decentralized system.

Any two of these four could theoretically collude and would together constitute a majority of the computational resources (hash power) needed for mining, and could then control the updating of the distributed ledger.

Confidentiality/transparency: All transactions are public, which has its pros and cons in terms of access to transactional information but not necessarily identification of participants to the network.

Governance: The original author of the Bitcoin open-source software is unknown and is open to question. Thus there is no clear structure for decision-making and the Bitcoin blockchain is heavily dependent on individual personalities and agendas.

Beyond financial services

This is the essence of distributed ledgers: they have the potential to enable any form of value to be exchanged between untrusted parties in an encrypted format, without the need for intermediation by a centralized authority. The ability to conduct transactions of any size with any form of asset suggests a future in which “things” in an Internet of Things (IoT) paradigm can be dynamically monetized. This will foster growth of the programmable economy.

Given the distributed ledger’s distributed, peer-to-peer nature, it’s understandable why leading financial services companies see the concept as both a threat (in terms of disintermediation) and an opportunity to reassert ecosystem control or radically change the cost structure of their operations – if they use distributed ledgers as participatory systems of record.

The insurance industry can also benefit from this concept, for example by verifying assets and preventing fraud.Everledger tracks thousands of diamonds by recording 40 data points unique to each stone in the distributed ledger. Any subsequent trade of the diamond can be traced to the previous transaction.

What’s important for CIOs is to look beyond these initial use cases to the radical possibilities for value exchange enabled by the programmable economy. Here, land titles can be verified, giving land owners in developing countries an indisputable record against corruption and theft. Immutable education records will foster global mobility of talent. Or, consider how autonomous cars will negotiate and pay for parking spaces, rideshares, and even lane changing when your time demands it.

CIO actions

CIOs should understand the current state of the art by doing proofs of concept, and implementing tactical, narrow-scope deployments that solve specific problems. The goal is as much in lessons learned as in business value delivered, especially as the enabling technologies are immature/unproven.

Next, while acting tactically, organizations should think strategically and conceptually about the longer term business models enabled by next-generation distributed ledger platforms that will facilitate their use.

Anything developed today, especially capabilities built on the original blockchain will have a useful life of at most 24 months at which time they will be replaced by more evolved distributed ledger alternatives.

(Ray Valdes is vice president and Gartner Fellow. David Furlonger, vice president and Gartner Fellow contributed to the article. The views expressed here are of the authors and CyberMedia does not necessarily endorse them.)