When you use an app like Venmo to pay a friend, the transaction feels seamless. With a few taps, your balance drops, and your friend’s increases—at least according to the numbers on your screens.
In the background, disparate systems need to prove that you and your friend are who you say you are, validate your funds, and settle the payment. It’s a process riddled with inefficiencies and reliant on a complex web of systems across multiple payment and banking companies.
In a 2008 paper, pseudonymous author Satoshi Nakamoto described a different approach: a peer-to-peer electronic cash system that could streamline the transaction process by eliminating the need for banks or regulatory bodies. That system, Bitcoin, now has an overall market capitalization over $71 billion. But it’s Bitcoin’s underlying technology, known as blockchain, that may have the most lasting impact. It’s blockchain that creates the public ledger of transactions that allows traders to authenticate their Bitcoins and trust one another.
Hewlett Packard Enterprise is among many companies interested in using blockchain technology to verify and move other valuable digital assets around the Internet. If the first iteration of blockchain technology enabled the development of cryptocurrencies, then the second will help facilitate complex business-to-business transactions across private ledgers.
Longer term, experts are looking at ways blockchain ledgers could transform how trust is established online beyond financial services. Blockchain, they say, has the potential to usher in an “Internet of Agreements” and create entirely new forms of property and ownership, similar to how copyright and patent law created new ways to buy and sell intellectual property like books and songs.
“The idea of having one common, synchronized, shared view of truth is of enormous use in finance and government, in supply chain, in food,” says Ian Brooks, HPE’s European head of innovation, naming just a few of the fields that stand to benefit.
“It’s Bitcoin’s underlying technology, known as blockchain, that may have the most lasting impact.”
Imagine seeing an apartment you’d like to rent, for example, and being able to take out an option on it, giving you time to check out the rest of the market without losing your chance at that first place you liked. Or imagine that, instead of reserving a vehicle through Zipcar, you could find and rent a car in your neighborhood for a few hours directly from the owner.
Blockchain could make these kinds of transactions possible, Brooks says. Inventory, insurance, and other information that would otherwise need verification could become a part of the transaction itself, eliminating the need for middlemen.
In the near term, researchers at HPE are adapting the concept and building secure blockchain testbeds. Longer term, these pilot programs could reveal how blockchain can help enterprises around the world—in industries ranging from financial services to humanitarian aid—save time and cost by cutting middlemen out of transactions and relationships.
Links in the chain
Digital assets are easy to copy. As a result, it’s hard to know whether to trust a digital certificate of ownership or a transaction record, without verifying its origin.
Blockchain provides a mechanism for authenticating each piece of data. Using hashing and time-stamping, each copy of the distributed ledger ensures the validity of the others.
In the case of Bitcoin, so-called Bitcoin miners—people with powerful computers and special software—verify “blocks” of transactions by solving a series of cryptographic equations. When a miner verifies a block, its transactions are recorded to the blockchain, along with the miner’s “proof of work,” which certifies its authenticity and value. (The miner gets new Bitcoins and collects fees.) The blockchain is then synced across the network, so that every participant has the most up-to-date ledger. Only Bitcoins with the most recent version of the ledger can be traded.
With each new block entered into the ledger, blockchain uses a hashing algorithm to produce a distinct sequence of characters, which also makes reference to the block just prior to it. This means that if anyone attempts to forge the hash on a given block—in order to insert a fraudulent transaction in the ledger, for example—he would have to refigure the hash for all previous and subsequent blocks. In order to keep up that falsehood, this hacker would need to have more computing power than the rest of the participants combined, a near impossibility.
With these features, trust becomes a baked-in feature, rather than something the parties to a transaction need to establish.
While Bitcoin is the best-known application of blockchain, it’s far from the only one. At its core, blockchain is, “this idea of a permanent ledger, where nothing is ever deleted,” says Rob Knight of blockchain think tank and investment fund Hexayurt Capital.
Making blockchain enterprise ready
There are now hundreds of cryptocurrencies, such as Ethereum, Ripple and Litecoin, each with its own flavor of blockchain, as well as blockchain startups trying to use the technology for tasks as varied as secure cloud storage and digital voting. Some second-generation blockchains, like Ethereum, allow for additional layers of code and instructions. These smart contracts, as they’re called, enable decentralized apps that run in much the same way as a cryptocurrency, but they can be used to create a distributed and unimpeachable ledger of almost anything.
KYC-Chain, for example, takes advantage of the Ethereum blockchain to create a secure, distributed “Proof of Identity” platform. Although that platform is still under construction, if it succeeds in its goal, KYC-Chain could streamline identity verification for businesses and financial institutions, while also giving individual customers complete control over their personal data and identity certificates.
Smart contracts could have more direct commercial uses, as well. Imagine using a blockchain-based payment app to buy concert tickets from an unknown and potentially untrustworthy seller. With a smart contract, the same technology that streamlines the monetary transaction could also be used to automatically transfer the tickets to your digital wallet once the transaction is complete. And if ticket inventory is also managed on a blockchain, you could confirm that the tickets are unique and valid without input from the issuer or seller. The seller’s identity is irrelevant because the transaction itself virtually eliminates the risk of fraud.
At the moment, however, Sandeep Panda, worldwide strategy lead for Blockchain at HPE, compares the current state of blockchain technology to the Wild West days of the Web in the early 1990s—it’s not clear which among the dozens of currently available blockchain platforms will succeed over the long haul.
Blockchain for business
Bitcoin’s blockchain ledger is open source, and accessible to anyone who wants to see it. In another challenge to its widespread adoption, that level of transparency isn’t always desirable for businesses.
“If you're in a regulated industry, or if you're doing mergers and acquisitions, or moving significant funds from one place to another, you’re not going to want that to be in the public domain,” Brooks says.
Earlier this year at its Discover conference, HPE showcased a prototype it developed with Commonwealth Bank of Australia that demonstrates how a private distributed ledger can simplify complicated transactions and automate tens of thousands of hours’ worth of back office work.
“The idea of having one common, synchronized, shared view of truth is of enormous use in finance and government, in supply chain, in food.”
Typically, when customers open a brokerage account, they have to fill out pages and pages of paperwork, which get checked by a branch representative, and again by someone at headquarters. It can take days to authenticate the information and approve someone to trade. Then, it can still take additional days to process and reconcile transactions between the bank, the investment firm and the fund itself.
For the prototype, HPE, Commonwealth Bank, along with DXC Technology implemented a distributed ledger technology called Corda, which is currently being developed by the R3 consortium of banks, regulators, financial institutions and technology companies. The team created a bespoke digital currency for Commonwealth Bank, which could then be redeemed through an app for shares of a fictional investment fund. Because the bank and fund are operating on the same ledger, both sides can see when a transaction is validated and the reconciliation process becomes unnecessary. With this approach, mutual funds could become as liquid as a checking account.
The Corda experiment also showed how a blockchain could eliminate the arduous, three-day paper onboarding process. The blockchain verified and securely stored a record of every user’s identity. That information can only be accessed by a customer using his unique key, but privileged third parties like banks or investment brokers can use the ledger for confirmation that a person is who she says she is. In other words, if you’ve done business with any partner bank on the system, you could instantly put your money into a fund. Verification becomes as simple as exchanging keys and the risk of fraud drops to near zero, which means financial institutions can free up capital usually set aside for insurance or unsettled payments.
Pilots like this have limitations, however. The Corda test only sped up transactions between partners on the system. And while HPE was able to run Corda on its mission critical infrastructure, for the time being, both sides would still need a way to reconcile those transactions with traditional systems, which can negate some of the time saved.
Then there’s the scalability issue. Bitcoin transactions take about 10 minutes to settle. This is an improvement over wire transfers that can take days to process, but still much slower than most existing payment networks. Private blockchains like Corda can speed up the processing time for transactions, Brooks says, but these small-scale tests only have a limited number of parties validating transactions, which could limit the system’s processing speed in the future.
Cutting the middlemen
Moving money isn’t free. Every middleman whose systems touch the transaction—banks, credit card processors, app operators, and the like—charges a fee, essentially for verifying that their portion of the transaction is valid. For global financial institutions, those fees and associated costs add up to billions annually. As HPE’s experiment with Commonwealth Bank showed, these costly verification steps become obsolete with a distributed ledger.
In a 2015 report, European bank Santander InnoVentures, consulting firm Oliver Wyman, and investment firm Anthemis Group predicted that major banks could save between $15 billion and $20 billion per year and cut out the need for these middlemen by replacing some of their systems infrastructure or back office processes with blockchain technology.
According to a report from the World Economic Forum, 80 percent of banks will also initiate or complete a blockchain test similar to HPE’s pilot with Corda and Commonwealth Bank by the end of 2017. But the next development won’t necessarily be a total overhaul of the financial system. It will be more like a revision, optimized by adapting the distributed ledger concept to existing systems.
“I think what's critical is not just how [blockchain adoption] will ultimately drive new efficiencies, but how it will change aspects of the business model,” Jesse McWaters, the WEF report’s author, says. “When you replace infrastructure, you have a ripple effect on the operating models of all of the institutions that use that infrastructure.”
A sea change in the financial-services industry could also present a major opportunity for new startups and emerging markets without legacy infrastructure to leapfrog incumbents and establish themselves on a global scale. As transaction costs are driven down and internal processes become aggregated or automated, researchers expect business models to shift in much the same way the retail industry has shifted since the 1990s, when secure online credit card transactions first made e-commerce possible.
Reduced overhead costs could make smaller players instantly competitive, but it could also add layers of complexity. Although a blockchain-based bank, for example, might have very low internal costs, it would still need to communicate with other systems to be useful.
The next major development of the blockchain—already dubbed Blockchain 3.0—will revolve around software-based smart contracts and distributed apps that can communicate and govern cross-chain communications. Eventually, a system of agreements and instructions could remove the need for human interaction and allow smart devices to act on their own, according to rules set forth in the blockchain.
With such an Internet of Agreements, new forms of property could start to materialize. When all parties share a view of the truth and agree to the same rules, for example, it’s easier to develop models of fractional ownership or resource sharing.
“Eighty percent of banks will initiate or complete a blockchain test by the end of 2017.”
Imagine if every car on the street was a public resource available to any verified driver. Rental fees could come right out of your digital wallet and the car itself could approve you to drive or communicate directly with a fueling station.
Or, imagine if a blockchain ID verification system becomes widely adopted: a person’s identity—and any property associated with it—could be confirmed even if her home, documents or even the entire government were destroyed by disaster.
“If you look at where we are now with the Internet, and you roll that back 15 years, you would never have expected half of what we do,” Brooks says. With blockchain, “there will be whole new collaborations, whole new business models, whole new industries potentially that spawn out of this technology in the long-term.”