(This article is a repost from A Smarter Planet Blog)
Over the past two decades, the Internet, cloud computing and related technologies have revolutionized many aspects of business and society. These advances have made individuals and organizations more productive, and they have enriched many people’s lives.
Yet the basic mechanics of how people and organizations forge agreements with one another and execute them have not been updated for the 21st century. In fact, with each passing generation we’ve added more middlemen, more processes, more bureaucratic checks and balances, and more layers of complexity to our formal interactions–especially financial transactions. We’re pushing old procedures through new pipes.
This apparatus–the red tape of modern society–extracts a “tax” of many billions of dollars per year on the global economy and businesses.
What can be done? One potential solution is an intriguing technology called blockchain, which is little understood outside a small fraternity of computer scientists.
Blockchain provides the technology underpinnings of Bitcoin, the crypto currency that has been the subject of much interest and speculation within the technical, business and law enforcement communities, and in society at large. (IBM is not involved in cryptocurrencies.)
To me, blockchain is the more interesting phenomenon. It’s a completely novel architecture for business–a foundation for building a new generation of transactional applications that establish trust and transparency while streamlining business processes. It has the potential to vastly reduce the cost and complexity of getting things done. Essentially, it could help bring to business processes the openness and hyper efficiency we have come to expect in the Internet Era.
Blockchain-based systems could help radically improve whole industries, beginning with banking and insurance. But its impact could be much broader. It could make a difference whenever valuable assets are transferred from one party to another and whenever you need to know for certain that a piece of digital information — anything from electronic artwork to the terms of a business agreement — is unique and unchangeable by any party without the agreement of all parties.
So, what exactly is blockchain? It’s a distributed ledger shared via a peer-to-peer network that maintains an ever-expanding list of data records. Each participant has a copy of the ledger’s data, and additions to the chain are propagated throughout the network. This way, all participants in an interaction have an up-to-date ledger that reflects the most recent transactions or changes. In this way, Blockchain reduces the need for establishing trust using traditional methods.
Take a business agreement between two or more companies. They can record the terms of that agreement on a blockchain, knowing it will execute and be enforced autonomously (e.g., “if you pay me in under 15 days, then I will give you a discount.”). Nobody is in private control of the ledger and nobody can secretly change the terms of the agreement. So, with blockchain, facts and agreements are recorded certifiably and indelibly, increasing trust, reducing risk, and thus reducing friction in business.
To understand the potential of blockchain, consider how global business is typically transacted today. Say a sheep farm in rural Sweden wants to pay a supplier of sheering equipment in New Zealand. The two businesses use different banks, logistics companies, and currencies, and they might also be subject to different government and industry regulators. So their seemingly simple transaction is actually a lengthy chain of interactions between a number of banks, intermediaries, and auditors. Each party maintains its own systems of record. The result is a complex, inefficient process that’s costly and time consuming.
But what if all the parties from the farmer to the supplier to their respective banks participated in a system using blockchain technology? The entire process could be handled within a single, transparent system shared among all parties, minimizing the potential for human error or malfeasance. And the entire process could probably be completed in minutes rather than days.
Or consider a quite different business scenario. There’s great potential for blockchain to be combined with Internet of Things technologies. For instance, a refrigerator equipped with sensors and connected to the Internet could use blockchain to manage automated interactions with the external world–anything from ordering and paying for food to arranging for its own software upgrades and tracking its warranty.
We believe blockchain is an extraordinarily important phenomenon, which is why IBM is deeply engaged in moving it forward.
In our view, most blockchain implementations, and the tools surrounding them, aren’t yet ready for many serious business uses. The concept and architecture are taking form, but some key capabilities and standards are missing or only now emerging. For instance, many enterprise applications require more extensive security capabilities than most of today’s blockchain implementations offer.
A number of companies are developing blockchain implementations, and we expect more to come. We believe that for blockchain to fulfill its full potential, it must based on open technology standards to assure the compatibility and interoperability of systems. Furthermore, the various blockchain versions should be built using open source software rather than proprietary software, which could be used to suppress competition. Only with openness will blockchain be widely adopted and will innovation flourish.
Already, our research and development teams are working on versions of blockchain that will be suitable for business, drawing upon our research insights and other related open source technologies. They are exploring a variety of blockchain implementations with our clients, working up specifications and preparing to contribute to open source projects that aim to make blockchain ready for business.
Over the years, IBM has helped enterprises harness the latest advances in information technology. We filled that role when the Internet first emerged in the 1990s, and we took the lead in mainstreaming Linux, Eclipse, Java, Spark and other open source technologies. Now IBM is committed to help make blockchain real for our clients and for business.
Today it’s imperative for the technology industry to work with companies in every industry to build applications to see how blockchain can best be used in business. We need to learn where the approach works and where it doesn’t. Out of these efforts, the best ideas will emerge and we’ll be able to spot gaps in technology or governance that need to be filled.
As always, IBM will explore these technologies with clients–with the goal of building a new generation of powerful platform technologies and applications that will shape the next era of business.
Arvind Krishna, SVP and Dir., IBM Research