Does the investment community understand what blockchains are?

Written by on September 16, 2016 in Guest Blog with 1 Comment

Businesswoman Mess on BlackboardRIoT has noticed a number of recent blockchain announcements that sing the praises of the technology for financial and IoT applications. However, while enterprise blockchain deployments certainly do have huge potential upside, it seems that a lot of those making noise in the investment community don’t entirely grasp the purpose of the technology.

At the heart of the matter, the blockchain is essentially a database that records transactions between entities trading bitcoin. Its strength comes from its distributed architecture, meaning that there are millions of copies of the blockchain out in the wild, so that no single person can offline or compromise the global system. It’s strongest trait is the trust it creates in bitcoin.

The blockchain is inherently distributed, spread among the millions of nodes that comprise the network. Consequently, an enterprise that is envisioning using a blockchain-based technology in a private deployment is sort of missing the whole point of it – and there are plenty of existing companies out there in enterprise IT that are capable of selling you a transactional database.

The bitcoin blockchain contains every single transaction, right back to the very first bitcoin that was mined. Without this complete record, the system cannot be trusted, and is arguable entirely worthless. In the IoT, if you don’t need that list to be publicly scrutinized, even by a fleet of your own devices, arguably there’s no need for the secret sauce that powers bitcoin.

So while it’s great news that the Linux Foundation’s Hyperledger Project has gained 17 new members, or that banks are investigating the technology to speed up transactions, it’s worth clarifying that the fundamentals of the technology are already out there in the world. Bitcoin is a very unique use-case that can’t be served by those technologies, however, and that’s why blockchain is inextricable from it.

Essentially, if your application doesn’t need a distributed ledger of all transactions made in the system, it likely doesn’t need to use a blockchain. There are many IoT applications where using blockchain functions do make sense, especially those with intermittent internet connections, but don’t be overly swayed by that sales pitch if it shows up at your door – if you have a system that uses a central point to coordinate operations, then using the blockchain for that system is a little redundant.

To expand on how it all works, the blockchain is the technology that underpins bitcoin, the leading cryptocurrency that has gained a whole lot of infamy from its associations with the dark web and criminal activities. It is so well-loved because of the anonymity that can be gained through its usage – something that a PayPal account or online banking don’t enable.

iEffectively, a user can mask their identity using a number of services that allow them to mask their transactions – or rather, mask the bitcoin that enter and leave their wallets. While the blockchain keeps a complete picture of the wallets and coins that interact globally, it doesn’t track the identities that own those wallets. You don’t need a national ID card to hold a bitcoin wallet.

The transactions themselves are studiously and entirely logged and tracked, as part of the distributed public ledger – a.k.a. the blockchain. After all, to have any trust in the system, you have to trust that the currency you are trading is legit, and that the wallet you are taking or receiving funds from has the prerequisite bitcoin.

Cryptographically-generated identities are key to this, and so is the ledger, which is stored on millions of devices and updated roughly every ten minutes, in a randomized fashion to prevent exploits or alterations.

The transactions are recorded to the blockchain, the chain-list of all the ten-minute transaction blocks, in a process called mining – which also helps generate new bitcoin that are released to the miners that have contributed distributed compute that are solving the complex mathematics that underpin bitcoin.

Essentially, the blockchain allows Wallet A to transfer bitcoins X, Y, and Z, to Wallet B. It can also then keep track of bitcoins X-Z as they travel between other wallets and bitcoin exchanges, and then through the bitcoin tumblers that help to anonymize those coins.

Written by Alex Davies | First published  at ReTHINK IoT

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  1. Avatar Michael Elling says:

    Guest writer, how would you characterize the use of blockchain for distributed power generation between many buyers and sellers?

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