Blockchain: Made of Steel, Copper or Mercury?

|August 24, 2016 0
Image courtesy of suwatpo at freedigitalphotos
Even as a major fintech conclave in Japan was seen dwelling seriously upon Blockchain and digital currencies this week, a lot is still amorphous about the promise and power of blockchains. Some recent incidents have only accelerated the questions that were on their way anyways

Pratima H

INDIA: Whenever something new happens, people first ask ‘why’ until they slowly move to ‘how’. In the case of a disruptive financial paradigm called Blockchain (which we covered on many dimensions already), the initial question however appeared to be this– Why not?

That too, not from just one side, but many.

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Like World Economic Forum (WEF)’s report that parked Blockchain technology in the lane of one of its six mega-trends. This confidence was understandably bolstered by findings like 58 per cent respondents expecting as much as 10 per cent of global Gross Domestic Product (GDP) to be stored on a Blockchain by 2025.

It is being surmised that Bitcoin and the Blockchain could reach a tipping point (of broad adoption) by the year 2027 itself with Blockchain projects rounding up investments beyond $1 billion next year. In fact, blockchain may help immensely in interaction and settlement times taken by financial players, and slice off as much as $20 billion in annual costs by 2021 for the financial industry if some estimates from Consultancy Accenture are to be believed.There are other studies echoing this anticipation.

Not just obvious spots like asset management; authentication; commercial distribution management but diagonal ones like communication; content; crowdfunding; finance prediction markets; public elections; sharing and storage too came up as ripe use cases as per what Nomura Research Institute (NRI) and Japan’s Ministry of Economy, Trade and Industry (METI) unearthed in a fresh survey.

A Synechron survey found many Finance Executives expecting this concept to have a huge impact over the next 10 years, with some 12 per cent pointing at current deployments in blockchain.

But the same study uncovered that in terms of hurdles, people are still wondering about unclear legal and regulatory aspects, unproven scalability and performance capabilities and interoperability as concerns.

The list is indeed longer than that. And would have to be sorted before the ‘next ten years’ shuffle things up as is being guessed.

Take the issue of data processing for starters.

A major upside of blockchain technology springs from the money aspect that backroom processing takes, and how banks, brokerages and insurers can gain from real-time sharing of huge piles of sensitive data, skipping stages of transactions like third-party verification in a secure model. Given the level of data and the way it is tackled in a concept that hinges on information construction, there is a big question about adequate computing power that continues to stalk blockchains. When that’s not on one’s mind, other aspects like the flip side of faster accounting or transaction transparency, integration of real money into blockchains, and getting a grip on smart contracts along with acute talent shortage in this new niche are other questions that take over. What one is basically hesitating over goes like this.

Metal or Jewellery?

Blockchains can deliver that fiercely disruptive stroke only if they can get enterprises to nod along as fiercely. Else, they will end up as another ‘was promising but too shiny and too soon’ thingy in technology museums.

That’s probably why Deepak Sharma, Chief Digital Officer, Kotak Mahindra Bank calls this time as early days. “We are exploring areas to build and test concept. Enterprises should start out with identifying area of high potential business impact because of blockchain and engage in POC (Proof of Concept) to validate the underlying assumptions and solutions and take it to the next steps.” He cautions.

There are some questions that would make sense for any enterprise at a consideration cliff here. If blockchains can answer them, they will get indoors and move beyond the bling-value.

How does this platform handle data security and privacy; How does it scale – in terms of computation, transactions per second, data storage and cost; How robust is the consensus model of the blockchain being used and what are its limitations; and how robust and secure are the p2p protocols that power the blockchain – are a few that Dr. Pandurang Kamat, Chief Architect- Innovation and R&D at Persistent Systems suggests.

In essence, how will this help my business, is the predominant filter that any serious potential adopter should be asking inwards before positing it outwards.

While the possibilities for blockchain implementations are virtually endless, Sandeep Kumar, Managing Director, Capital Markets, Synechron is certain that a focused business analysis will help financial institutions determine where blockchain can add true value. “Actionable blockchain plans need to be more customized to the unique business needs of the company. The blockchain will move away from resource-intensive mining to more efficient transaction consensus methods.”

Enterprises, particularly regulated ones, are rightfully resistant to creating more porous boundaries, put their data on machines outside of their networks and have non-deterministic components (such as transaction rates) in system execution. Dr. Kamat dissects how these are the ones that were slow to move to the cloud and will adopt slowly to blockchain. “Even though lots of BFSI players have jumped into the Blockchain pond and are prototyping at full throttle, they will take their time before they adopt it in mainstream business IT.”

And the timing of things slipping off is not helping much here.

Watch out for Dents

If anything, unfortunate mishaps like the Ethereum DAO hack have only compounded the fears that exist or are about to arrive. Security, immutability and the code’s own rigor helping vulnerabilities were just a few alarm bells that rang when a hack hit the biggest and the earliest Blockchain project Ethereum.

The cost of replacing existing systems would be prohibitively large, as per Japan's Ministry of Economy, Trade and Industry (METI)'s study Courtesy Toa55 at freedigitalphotos

The cost of replacing existing systems would be prohibitively large, as per Japan’s Ministry of Economy, Trade and Industry (METI)’s study

DAO hack is a reality check on the consequences of poor coding, but it doesn’t weaken the central theme of ethereum or blockchain. The fork discussion however is a bad omen, Dr. Kamat points out. “It implies that Ethereum central team is willing to accommodate special conditions to deliberately alter the ledger retrospectively and change what happened.”

Could the hack indeed have been a curse in disguise?

Counter intuitive though it may seem, the DAO hack in the reckoning of Deepak Kinger, Vice President, Banking and Financial Services, VirtusaPolaris has actually helped in the evolution of Blockchain ecosystem. The coming together of the Ethereum community to unanimously vote (97 per cent holders voted in favor) for the hard fork and deny the DAO thief of the gains from the hack is major win for the adoption of the technology, he contends. “That aspect combined with the safeguard of the lock in period of the smart contracts establishes that fact that it can self-correct when things go wrong, which is a big difference when compared to Bitcoin.”

Any time a new technology is introduced, there is the rush for bad elements to figure out how to exploit it, notes Kumar. Regardless of the technology being used, financial institutions will need to continue to work tirelessly to stay one step ahead of bad guys. “That said, a financial services blockchain has an evolution path ahead and these are all part of learnings. We’ve found that companies like Ethereum and Hyperledger better suit the needs of financial institutions as there is a good eco-system of tools getting developed by firms like Consensys.”

Sharma looks at it this way. Weakness gets uncovered as technologies evolve. “Effective solutions get identified and developed, and the strong one emerges. Competition helps in evolving the stronger solutions.”

Slabs, Rolls and Sheets

Fears and hacks notwithstanding, adopters are eagerly trying to get a grip on the best way to make sense of this new model. Interestingly, Blockchain, per se, may not be a ready ground for adoption but a lot can happen on what is built on/through it.

Sharma counts that it will depend on the context. Like new solutions on international remittances may be completely built on blockchain. The way Dr.Kamat looks at it too, Blockchain is a tool. Adoption will occur when we build useful apps that deliver a unique value to the end users.

Benefits that can accrue to adopters can span in many directions. The concept can inject a higher degree of trust and transparency to online transactions while it swipes away an aging banking system. It can bring in that much needed simplicity for B2B payments and make space for smart contracts that are conspicuous by their absence in the current digital-everything age.

Dr. Kamat cites possibilities like replacing multi-party netting and settlement systems using blockchain as a single source of truth and smart contracts for consistent computation across organizational boundaries. Then there is scope for real-time payments , eliminating costly (time and money) trusted third parties and increasing liquidity.

Blockchain networks are also going to have data that can be leveraged by enterprises for deeper insights around customer behaviour, right sell opportunities, product performances, risk management, fraud detection, surveillance, anti-money laundering, real-time processing etc. as Rajashekara V. Maiya, Associate Vice President & Head – Finacle Product Strategy, EdgeVerve adds.

Strike the metal hot

Doubts exist but not everyone is dismissing or procrastinating blockchain as a timely thought.

In fact, there are optimists like Dr. Kamat who recommend that instead of waiting in the wings, enterprises should be jumping in now, with care. “Leading enterprise platforms such as Linux Foundation’s Hyperledger have a long way to go before they are production-ready. However, that should not stop us from building working prototypes that show the art of the possible so we are ready to accelerate as the platforms mature and stabilise.” He reasons.

The governor of the Bank of Japan has just picked artificial intelligence and blockchain as advances capable of altering the face of financial services Image courtesy of Ambro at freedigitalphotos

The governor of the Bank of Japan has just picked artificial intelligence and blockchain as advances capable of altering the face of financial services

Kumar helps here. “We’re finding there is a tremendous atmosphere of excitement around blockchain, but financial institutions are unsure on how to take actionable steps on their blockchain implementations.

Just like in any other technology evolution, there are Enterprises who enjoy being the first mover and others follow later. The first movers will have to take that additional step of validating, verifying the right use cases, convincing the eco system to adopt. Maiya swings in a knife to slice things better.

The real questions that these first movers should be handling depends on the nature and kind of exploration that these enterprises are currently in. it includes the cost-benefit analysis, innovation quotient, creative confidence and the eco-system impact.

Kinger offers more questions that enterprises can wield to size up the concept better. Will we leverage private or public blockchains or look at a hybrid model? Different use cases will require different models: How will Blockhain co-exist with the existing legacy infrastructure? Who would we need to collaborate with – peers, industry bodies, and government agencies? And of course, what regulatory approvals will be needed before going live with their Blockchain based solution?

Another seemingly-too-early one but quite fitting would be this – When should the enterprise start accepting cryptocurrency and how will it interface with the fiat currencies?

With the right questions tackled, the concept can swim across many boiling cauldrons and and turn into a new bar quite strongly.

In the financial services world, over 45 global banks have recently joined a blockchain startup, called R3 CEV to develop common standards for the industry.  It seems that with such a significant investment being made into this technology, there is a growing sense of ‘missing out’ on blockchain. Firms recognize that the world will change around them, and first movers have a chance to enhance security, minimize fraud, generate new revenue streams, improve customer experiences and completely reshape the markets of the future, Kumar stresses.

“There is a need to separate the useful use cases from the popular ones.” When he says that in the same breath the next question is quick to follow.

So adoption will happen, and the concept will run its course of ups, downs and may-be’s. Who knows the face and guts of financial world would be really hard to recognize from the day Blockchain becomes ductile enough. That means, a ‘How’ looks all set to trickle in.

It’s just a different ‘How’ this time.

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