The promise of the blockchain technology

WEPOWER IS a Lithuanian startup that aims to change the way renewable-electricity projects are paid for. The government-guaranteed prices that have propelled growth in wind and solar energy around the world are being cut back, says Nick Martyniuk, WePower’s founder. So his firm wants to help developers of renewables raise money by selling the rights to the electricity their plants will produce once built. Customers will buy a smart contract now, running on Ethereum’s blockchain, that will provide them with power later.

Using a blockchain offers several advantages, says Mr Martyniuk, who used to work as an energy trader. Big energy users such as foundries and aluminium smelters already negotiate such contracts with power stations, but they are often complex and time-consuming. Contracts on a blockchain could be offered off the shelf, allowing smaller companies—and perhaps, one day, individuals—to use them too. Such contracts would be as easily tradable as any other crypto-asset, creating a secondary market in power agreements.

The blockchains that run cryptocurrencies (see diagram below) could have far wider applications than tracking the transaction history of electronic cash. Investors have taken note. Crunchbase, a business-information firm, reckons that in the first five months of 2018 blockchain startups raised more than $1.3bn from venture-capital firms, compared with around $950m in the whole of 2017. Cloud-computing platforms from Amazon, IBM, Microsoft, Oracle and others let users experiment with using blockchains in their businesses. Professional-services firms such as Accenture and PricewaterhouseCoopers are lining up to advise clients on the new technology.

The idea is that, because blockchains use distributed rather than centralised records and are more tamper-proof than other databases, they can be applied to tasks from streamlining medical record-keeping or trade finance to ensuring that diamonds and other minerals are ethically sourced. Santander, a bank, has said that adopting blockchains could save the finance industry $20bn a year in back-office costs. Creative minds are already turning to exotic applications. LegalThings, a Dutch firm, announced in April that it wanted to put sexual consent on a blockchain; lovers would sign an unalterable electronic contract before taking things further and send copies to thousands of strangers for safekeeping.

The feature that most business blockchains share with the bitcoin original is that the information stored in a blockchain is kept by the system’s users, not by a central authority, and that each entry is cryptographically linked to the ones before and after it. But businesses do not share the ideological motivations of bitcoin’s creators, so they can throw out parts of bitcoin’s technology they do not need. For example, both the bitcoin and the Ethereum blockchains are public and open for anyone to inspect, so they need a formal verification process for all transactions. But few businesses are keen to lay their back-office functions bare to the world, so most enterprise blockchains are both private and “permissioned”, meaning that access is restricted to trusted users. Corda, a finance-focused blockchain developed by r3, a consortium of banks, and Hyperledger Fabric, originally developed by IBM and a firm called Digital Asset, work this way. Allowing only trusted participants removes the need for the wasteful proof-of-work systems that many cryptocurrencies use to update their records.

Most attempts to use blockchains remain tentative

Other vendors weaken the cryptography that makes bitcoin transactions immutable. One reason is that European data-protection law gives individuals the right to ask for their data to be removed from a company’s servers and imposes big penalties for non-compliance. Similar rules apply to medical data in America. But entries in a standard blockchain, once created, cannot be altered. Accenture has developed a mutable blockchain in which the content of individual blocks can be modified, leaving a digital “scar” to indicate that they have been changed.

Some business users prefer not to use the term “blockchain” at all, perhaps because they want to dissociate themselves from cryptocurrencies and their sometimes shady reputation. Corda, Digital Asset and a number of other firms like to call it “distributed-ledger technology”. But whatever the name of the game, there is no shortage of proposed uses.

All together now

A common one is to smooth business transactions by allowing the different entities involved to draw on the same records. Simon Whitehouse, managing director of financial services at Accenture, reckons that blockchains could help streamline supply chains by allowing records to be shared by suppliers, shipping companies, import agents, customs officials and so on. This would also make dispute resolution easier where supply chains cross international borders, he says. At present all those involved in a supply chain use their own proprietary systems to track consignments, so the same data are being used in different formats and different places and have to shuttle from one database to another. Replacing all that with a single distributed database for everyone’s use could offer big savings. Accenture is already piloting such a scheme with a big technology company.

The finance industry is experimenting with the technology, too. Fusion LenderComm, developed by a firm called Finastra, is running on r3’s blockchain. It aims to streamline the syndicated-lending business, in which groups of banks jointly provide large loans for infrastructure projects, connecting the individual bank systems to provide a consistent view of these loans across agents and lenders.

The Bank of Canada and the Monetary Authority of Singapore are collaborating to investigate blockchains as a way of improving international payments. Banks in different countries often run computer systems that cannot easily talk to each other, which makes payments slow and expensive. A single shared ledger could relieve much of the administrative burden. Santander has launched a smartphone app called One Pay FX that lets customers send international payments in a matter of seconds and tells them when they will arrive. Instead of the standard international financial plumbing, One Pay FX uses a closed, permissioned, quasi-blockchain system operated by Ripple, an American firm.

The cryptography that protects entries in a blockchain from tampering could also be used to build robust registers of everything from property deeds to company accounts. Several countries, most famously Honduras, have flirted with the idea of putting their land registries on blockchains to guard against fraud. DHL, a big logistics firm, is testing whether the technology could be applied to shipments of medicines. Everledger, which raised $10.4m of funding in March, aims, among other things, to use blockchains to track the provenance of diamonds, from the mine to the wearer’s finger.

Not so fast

For all the technology’s potential, though, most attempts to use it remain tentative. Honduras’s property blockchain, originally announced in 2015, was eventually abandoned in the face of official indifference. And some supposed successes turn out to be wildly exaggerated. A rash of reports earlier this year that Sierra Leone had run the world’s first blockchain-powered election, using software from a Swiss startup called Agora, had to be corrected on Twitter by the country’s National Electoral Commission. It pointed out that the election had been tallied on to its own database, which “does not use Blockchain in any way”. Agora, it appeared, had merely been observing the election, and its blockchain tallies did not match the official ones.

The advantages of blockchains are often oversold. Because of the overheads involved in shuffling data between all participants, blockchains are less efficient than centralised databases, a problem that gets worse as the number of users rises. When the Bank of Canada tried using blockchains to process domestic payments, which are already quite efficient, it found they offered no benefit. Stripe, a big digital-payments firm, has abandoned its blockchain experiments after three years of trying, describing the technology as “slow and overhyped”.

Talk about blockchains as “truth machines” is particularly unhelpful, says Kai Stinchcombe, who runs True Link, a financial-services firm for retired people. Many products, such as diamonds or luxury handbags, already come with certificates of authenticity. A blockchain could reassure buyers that those certificates have not been tampered with. But that is not the same as proving they are true. “If you put garbage onto a blockchain, all you get is distributed, encrypted garbage,” he points out.

Verisart, a firm that hopes to reduce art fraud by providing blockchain-powered certificates of an artwork’s provenance, is a case in point. Armed with a picture from Wikipedia and an impish sense of humour, Terence Eden, a developer at Britain’s Government Digital Service, convinced the firm that he had painted a work called “La Gioconda”. That information was added to Verisart’s blockchain, where it was widely distributed and cryptographically secured. But that did not make it right. The painting is better known as the “Mona Lisa”, created by Leonardo da Vinci in 1503. In the same vein, says Mr Stinchcombe, a blockchain may make it easier to verify the paperwork that claims to show that a diamond is ethically sourced, but it cannot stop mine operators falsely claiming that their products are legitimate.

The obvious way to think about blockchains is as a kind of database, though a more exact definition that commands general agreement is hard to come by. The original blockchain, invented to power bitcoin, was designed to solve a specific problem, says Richard Brown, chief technology officer at r3, a blockchain firm: “How can I build a system of electronic cash that is resistant to official censorship and confiscation?” Bitcoin does the job passably well but extremely inefficiently.

Enthusiasts are also beginning to realise that even when a blockchain might be a suitable tool for the job at hand, they will still need to resolve the same sorts of problems as for any other big IT project. Proposing a new standard is the easy part. The point is to get everyone, including competitors with little love for each other, to agree on important details such as who will be in charge, how the system will be built, how data formats will work and what happens if someone wants to leave. As David Gerard, a blockchain sceptic, puts it: “Blockchains don’t solve the underlying problem of agreeing on what you want to do and how.” Applying blockchains to highly regulated industries such as finance, says Mr Brown at r3, means reassuring regulators that the systems can operate as planned, and that systemic risks can be minimised.

Computer scientists point out that the ideas underlying blockchains are hardly new. For example, the cryptographic linkages that secure entries in a block, known as Merkle trees, were first proposed in 1979. Still, the impression of novelty may serve a useful purpose. Sam Chadwick of Thomson Reuters notes that the word “blockchain” can help spark interest among senior managers in the kind of back-office improvements that they would normally consider dull. And once competitors are sitting round a table, they find it easier to put aside their differences and work out more efficient ways of doing business. Mike Pisa of the Centre for Global Development, a charity, has been studying possible uses of blockchains in poor countries and finds that “it’s a word that can attract attention to things we could have done before. That’s a positive.”

Tim Swanson, at Post Oak Labs, thinks blockchains are entering the “trough of disappointment” in the “hype cycle” proposed by Gartner, a technology consultancy. At this point, after an initial surge of excitement, reality reasserts itself as the limits of a technology become apparent. The key to making blockchains useful will be to manage expectations. And sometimes it is best to concede defeat. When Ujo Music tried to blockchainify the notoriously messy business of arranging payments to artists in the music industry, it did not succeed. The musicians were fazed by the technobabble; the technologists who had been called in did not understand the industry they were promising to revolutionise. They concluded: “We are but a few bright-eyed technologists with a special hammer, looking for the right nail.”

Read on: From one cryptocurrency to thousands>>