The CIO’s Guide to Blockchain

Blockchain is only the first step in a future of distributed ledger platforms that enable the programmable economy.

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 (and legitimate) 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,” says Ray Valdes, vice president and Gartner Fellow. “If anything, it is still too early.”

Currently, the technology is not yet able to meet the requirements of these futuristic visions of global-scale digital business and what some call the “Internet of Money”.

Read More: Are You Ready for Blockchain? [Infographic]

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, which over time will evolve to a global-scale programmable economy.

Blockchain 101

An explanation of blockchain begins with the Bitcoin cryptocurrency, since it is the first implementation of distributed ledger technology, launched in 2009, and now, about 500 million transactions later, managing assets worth more than $70 billion. The ledger records transactions in bitcoin currency in a “chain-of-blocks” data structure, where a block is a group of transaction records added every few minutes in a never-ending series. The ledger records the sequence of every transaction and every “coin” (virtual currency stored as information bits). The smartest criminals on the planet have had 8 years to break the security of the information stored in the distributed ledger, and have failed. The ledger is an immutable, tamperproof, uncensorable record of all transactions since the first “genesis” transaction. The ledger is called “distributed” because the data gains immutability by being massively replicated across a computer network of thousands of machines in a network where the participants don’t know each other or trust other. Security is handled by cryptographic protocols and techniques that insure the permanence, resilience and immutability of the data.  In order to achieve this goal of a “trusted record within an untrusted environment”, the ledger in 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.

In its current form, blockchain suffers from significant limitations in scalability, governance and flexibility.

“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)”, says Valdes. This formula, however, has its limitations.

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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 enable a decentralized business ecosystem of many participants, who don’t know each other or trust each other, to transact with each other and share valuable data in a way that does not require a central authority or trusted intermediary. In this sense, the Bitcoin system is designed to destroy the banking system as we know it, by making intermediaries such as banks irrelevant. The disruptive potential of blockchain technology has captured interest among many outside the financial sector as well. However, “In its current form, blockchain suffers from significant limitations in scalability, functional scope, performance, efficiency, and operational manageability — hampered by a lack of organizational governance and flexibility,” says David Furlonger, vice president and Gartner Fellow.

There are close to a hundred other blockchain platforms that seek to address the technical limitations found in the Bitcoin stack, and expand the scope to allow solutions in non-monetary areas such as health care data, government records, legal contracts, supply chain manifests, manufacturing bill of materials, Internet of Things data, and so on. Most of these platforms are still under constructions, and even if released, are very new and largely unproven. The strong second to the Bitcoin stack is the Ethereum platform, which is more powerful and more scalable but still suffers from significant limitations.

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,” says Valdes.

Read More: What to Tell The Board About Blockchain

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 support diverse forms of value exchange (not just payments) around 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.

Read More: Blockchain Goes Beyond Financial Services

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 is a blockchain-based ledger that combats insurance fraud by tracking thousands of diamonds through their entire supply chain cycle, starting with the recording 40 data points unique to each stone in the tamperproof distributed ledger. Any subsequent trade of the diamond can be traced to the previous transaction.

Look beyond these initial use cases to the radical possibilities for value exchange enabled by the programmable economy.

What’s important for CIOs, notes Furlonger, 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 explore the potential of this disruptive technology but also recognize the limitations of the current generation of blockchain platforms. They should gain an understanding of the current state of the art by doing proofs of concept, and implementing tactical, narrow-scope deployments that solve specific problems, according to Valdes. “The goal is as much in lessons learned as in business value delivered, especially as the enabling technologies are immature/unproven,” he says.

Read More: 7 Strategies to Gain Value From a Doomed Blockchain Project

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,” says Furlonger, “at which time they will be replaced by more evolved distributed ledger alternatives.”

This research is part of the Gartner Special Report “Practical Blockchain: A Gartner Trend Insight Report,” a collection of research that focuses on helping CIOs understand blockchain, its uses, and the hype surrounding this technology.

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