Why I am Officially Proclaiming 2017 the Year of the Enterprise Blockchain.
First let me be clear. I’m not proclaiming 2017 the year enterprises abandon government sponsored currencies in favor of bitcoin. For that type of prediction, you need to update your antivirus and head to another corner of the internet.
I’m talking about blockchain. Bitcoin uses a blockchain, but blockchain is not Bitcoin. In fact, from an enterprise perspective, I think it is entirely appropriate to think of Bitcoin as a crude, early proof-of-concept showcasing some of blockchains potential. Bitcoin is the first peek at a technology that has the power to fundamentally alter all types of transactions that require some level of trust between parties –which is to say almost everything.
I’m not dismissing Bitcoin of course. But over the last four years blockchain development has moved faster than even the most optimistic technologists dared to imagine. In early 2013, bitcoin’s meteoric price gains caught the attention of the general public as well as Venture Capital checkbooks. The profit potential of a peer-to-peer electronic form of money was, and remains, tantalizing. But the over $1 billion in venture funding that poured into Bitcoin startups by the end of 2015 may have been chasing the wrong unicorn. Satoshi Nakomoto struck technology gold when he first introduced Bitcoin back in 2009, which employs a blockchain powered by a revolutionary concept of distributed trustless consensus called proof-of-work. However, eight years later it is increasingly clear that the potential uses for blockchain go far beyond support for crypto currencies.
For all its promise, Bitcoin uses an alpha version of blockchain technology. That’s a function of being first. Much of the reason Bitcoin’s market cap stands at more than 2x its closest competitor stems from that first-to-market advantage and the network effect it engendered.
So what is alpha about Bitcoin? For starters, Bitcoin uses a public blockchain, built for completely trustless transactions. This means that Zhihong in China can send bitcoin to Alice in America and be completely confident in the validity of the transaction, despite having bypassed all the institutional checks provided by governments and banking institutions. But to achieve this, Bitcoin relies on a consensus mechanism that is as clunky as it is secure. Specialized computers operating all over the world run by so called “Bitcoin miners” crank through literally quadrillions of computations a second to mathematically ensure every transaction that appears on the Bitcoin blockchain is valid and irreversible, a process which has proven to be hugely energy intensive.
Then there is the challenge of leveraging Bitcoin for other applications. Bitcoin offers a scripting language that is extremely challenging to develop in. Later-to-market protocols like Ethereum, which includes a Turing-complete smart contract programming language, represents a significant improvement over Bitcoin from a development standpoint.
However, both protocols are hampered by the security concerns of being publicly accessible. Bitcoin and Ethereum, with market caps of roughly $45 billion and $20 billion respectively, have enormous bullseyes on their backs for hackers. The hack of the DAO last June resulted in $80 million in stolen funds. Even though the money was later recovered and Ethereum itself was not directly compromised, security concerns remain at the forefront of all development efforts for both Bitcoin and Ethereum.
Enter the enterprise blockchain. Where public blockchains must consider all the security vectors exposable by completely malignant actors, enterprise (or private) blockchains can take a different approach. In essence, they can employ alternative — more agile forms of consensus.
So, what does consensus mean on the blockchain? The ability to establish a trusted source of truth without need for the labor-intensive processes employed by banks, clearing houses, title companies, software license developers, etc. This is an incredibly powerful idea. To reach consensus in a public network, Bitcoin and Ethereum must rely on highly redundant, energy intensive, and publicly exposed methods.
Private blockchains, by contrast are able to determine their own rules for reaching consensus, allowing far more flexibility than is available in the public model. Notable private consensus models are proof-of-stake, quorum-based protocols and others that are gaining credibility including proof-of-elapsed-time.
Enterprise chains can offer a much wider range of functionality within their more constrained environments. HydraChain, Rubix (by Deloitte), BlockApps, Quorum (by JP Morgan), Microsoft’s BaaS, DFINITY, Hyperledger (spearheaded by IBM), Axoni (which recently closed a major partnership with DTCC along with IBM) and others are major players in the enterprise blockchain space that will help define the direction of blockchain innovation over the next 12 months and beyond.
IBM in particular has been experimenting with a kind of OpenStack for blockchain in Hyperledger. Using an open source environment, there are already numerous distinct built-for-enterprise consensus mechanisms in Hyperledgers’ development pipeline.
The key insight here is that even beyond the obvious applications of financial asset transfer enterprise chains can be deployed within institutions under parameters defined and built around that institution’s exact needs. Unlike the public chain which must generalize away a lot of the blockchains powerful features, enterprise chains have the luxury of deploying functionality suites that are fully customizable.
While enterprise chains are the relatively low hanging fruit, you can imagine industry specific SMB chains won’t take long to follow. This portends the emergence of multi-billion dollar organizations focused on providing these customizable chains to virtually every business and sector in the modern economy. Enterprise/private blockchains could be used to increase efficiency in everything from as-is processes, internal database synchronization, and build incentive structures tailored to departments or even individual employees using smart contracts. The most exciting part about blockchain is that many use cases have yet to be imagined.