Future of Blockchain Technology
It has been close to 8 years since blockchain technology has been invented but still it is far from becoming a mainstream phenomenon. The concept paper on bitcoin powered by blockchain technology was first published in the year 2008 by Satoshi Nakamoto. There are numerous challenges as well as limitations that blockchain has to overcome before widespread commercial adoption becomes a reality.
In this article, I will briefly look at the concept of blockchain and make an attempt to visualize the future of blockchain based on current landscape and challenges. In this article, I’ll limit my discussion only to the banking industry as this is my interest area.
Let’s first start with Byzantine Generals Problem which was first solved by blockchain technology.
Byzantine Generals Problem[2]
Imagine a castle is being attacked (GOT fans can relate toJ) is surrounded by four armies each led by a different lieutenant. The four army is awaiting the message (attack time) from the General to attack. The attack would only be successful if all the four army lieutenant attack simultaneously. The General suspects that the any of the lieutenants can alter the message before circulating with other lieutenants i.e. any of the generals can prove to be traitor and willfully lose the battle.
The solution to this problem is to create a special box with two set of keys- one private and one public. The private key will be owned by the General while the public key is given to the Lieutenants. Using the private key, the General embeds the message in the box and sends to its lieutenants. On receiving the message, none of the lieutenants will be able to alter the message before passing on to the next one. Thus, all the lieutenants read the same message and attacked at the same time. Thus, they won the battle.
Similarly, using blockchain technology the contents can be shared without the possibility of being altered.
Blockchain Overview
Blockchain technology is based on distributed model which is outside the purview/ownership of banks or governmental organizations or any other kind of middlemen. The technology offers low transaction cost, is secure and transparent[3].
Blockchain has numerous applications in different industries. The below figure provides a quick summary of the different applications of blockchain.
Figure 1: Application of blockchain (Source: Medium.com)
How blockchain works?
As this article is not based on how blockchain works, I have reproduced a simple blockchain workflow which can help the readers to quickly refresh their understanding of blockchain technology. The below workflow is specific to one of the applications of blockchain technology in payments domain.
Figure 2: How blockchain works (Source: Huffingtonpost)
Future of blockchain technology
Few organizations including DTCC and Nasdaq have started work on implementing blockchain technology. DTCC intends to use this for post trade processing while Nasdaq wants to use this technology for voting in shareholder’s meetings.
The figure below depicts the responses gathered from 200 banks on their opinion on blockchain adoption. A vast majority of respondents feel that blockchain will see commercial adoption by 2020.
Figure 3: Survey on commercial adoption (Source: IBM Corp/Bloomberg)
The following three laws suggest that the cost of blockchain technology will reduce substantially in near future which will make the blockchain solution even more attractive:
- Moore’s law: According to this law, the cost of “processing” digital information halves every 18 months.
- Kryder’s law: According to this law, the cost of “storing” digital information halves every 12 months
- Nielsen’s law: According to this law, the cost of “shipping” digital information i.e. bandwidth halves every 24 months.
Based on the “theoretical” laws/framework, it appears that blockchain can indeed become mainstream technology in next 4-5 years but if one takes a practical approach, there are numerous challenges which haven’t allowed blockchain to be successful as of now and will continue to impede the commercial implementation of this technology.
Some of the key challenges are listed below:
- Regulatory approval: Before blockchain technology gets the formal regulatory nod, it will never be a mainstream technology. Before getting the regulatory nod, the regulatory framework has to be defined and approved by the policy makers and regulators.
- Overhaul of existing technological landscape: Most of the banking applications is based on obsolete technologies (e.g. mainframes) or packaged core banking solutions. It will be extremely difficult as well as expensive to integrate blockchain technology with existing bank’s IT infrastructure.
- High Capex: Like with most new and latest technologies, block chain technology will also entail high initial capital expenditure cost to setup the infrastructure and processes around this new concept. High Capex would however fetch long term savings for the banks due to low transaction costs.
- Privacy concerns: In banking, the biggest asset of a bank is trust and winning customer’s trust isn’t easy. There are many security concerns around block chain technology as this concept is based on distributed model. It will be very difficult to convince the customers to seek their consent to host personal data over blockchain solution.
- Slow processing: In the current form, the bitcoin blockchain can only process 7 transactions per second and it takes around 10 minutes for a block to be added to the ledger [1]. The volumes in today’s banking environment is huge and hence blockchain technology needs to evolve to cater to such high volume of transactions.
- Possible security breach: Although blockchain technology is secure and transparent but one of the implications of this is that anyone who owns 51% of computing power in the bitcoin blockchain network can potentially alter the ledger.
Despite the challenges, blockchain technology will definitely see large scale commercial implementation but this might not happen in next 5-6 years. Like Nasdaq and DTCC, many organizations will continue to test out the technology on smaller scale, assess the risk and then go for large scale implementation. This approach definitely makes sense as it’s extremely important to understand the limitations of a new technology before implementing on mission critical projects. The commercial adoption of any revolutionary technology takes decades (e.g. Internet) and when the question is about implementation in banking domain, it is not going to be any quick. Unless there are some drastic developments in blockchain technology which can overcome the limitations and banking organizations around the world take active interest in harnessing this technology, blockchain will not see commercial success anytime soon.
References
2. http://lamport.azurewebsites.net/pubs/byz.pdf
3. https://bitcoin.org/bitcoin.pdf
Very good understanding.
Informative article..