Blockchain For Beginners: Year of Hype, Year of Promise

The speaker took the stage in front of an audience of marketing professionals and pulled up a slide that made the audience break out in laughter: “WTF is Blockchain.”

Like “artificial intelligence” and “machine learning” before, “blockchain” is both a buzzword and a black box for many corporate officers, who are being asked to evaluate projects based on a hot concept they are still struggling to grasp. A Deloitte study found that 39% of executives at large companies had little or no knowledge of blockchain.

Holiday 2017 is wrapping up blockchain with a bow, and 2018 looks like a promising inflection point for the technology, thanks to increased concern over data security that peaked with the news of huge breaches at Yahoo and Equifax, among others. Retailers—which are particularly vulnerable during this high-traffic holiday period—have been experimenting with blockchain applications for controlling inventory since last year at this time, both to expedite shipments to stores and to prevent “shrinkage” of goods along the way.

Merchants are also now leveraging the technology in their loyalty programs, to avoid common holiday scams such as return fraud and to protect customer data and avoid breaches. New blockchain-based loyalty programs, such as Loyyal and Blockpoint, have launched in time for this holiday season.

“The more those things keep happening, consumers won’t want something new—they will force something new,” said Dustin Engel, general manager of the Advance Media Team, Analytics and Data Science at ad agency PMG.

“This is the year of hype. Everybody is learning about it [blockchain] and nobody knows what to do,” said Pavel Cherkashin, co-founder & CEO Of Blockchain Programmatic Corp., a media-buying platform launching Dec. 1. “Next year will be the year you will see the real business applications around multiple verticals.”

Right now, companies ranging from technology giants Samsung and IBM to garage-based startups are applying blockchain to a variety of uses, most notably launching cryptocurrencies to compete with Bitcoin in the payments arena. The Deloitte study found that 42% of respondents with knowledge of blockchain think it will disrupt their industries, while 55% think they will lose competitiveness if they don’t adopt it.

“We have a big bet on it,” said Babs Rangaiah, executive partner at IBM iX.

“This is going to be a massive shift as it relates to transactions.” He noted that IBM CEO Ginny Rommety has said that Blockchain will revolutionize payments the same way the Internet revolutionized communications.

Knowledge gap

The knowledge gap regarding blockchain does open the possibility of overhyping the technology, said William Saito, Palo Alto Networks’ regional CSO, Japan.  Many people are using the term for uses it wasn’t meant for or to make things intentionally convoluted—an “unintentional Rube Goldberg-type system to apply ‘blockchain’ in something that would have been way easier using another method,” he said.

Simply put, blockchain is a ledger shared among a group and only members of that group can make changes by agreement. Each separate point in the transaction is a block in the chain that can’t be changed without changing the other blocks, which provides the first layer of security.

Palo Alto Networks’ CSO Rick Howard explained: “The blockchain process seems convoluted but there is a purpose. To prevent fraud, the complex math problem that the system generates is dependent on the data from the previous block. The math problem for that block is based on the block before it—and on and on to the beginning. If a Bitcoin practitioner wanted to secretly subvert the values in the transaction chain without anybody knowing it…he or she would have to solve all the math problems from the block they want to change up to the current block in the time it takes the miners to solve the current math problem. I know that sounds like a lot of computer mumbo jumbo but, trust me, there is not enough computational power in the universe to accomplish this feat.”

Updates are distributed across the network and encrypted, so there is no central point of attack, providing the next security layer. Entities on the blockchain can remain anonymous, but everyone in the chain sees the transaction progress, which provides a third security layer.

“You can see where a technology such as blockchain might be useful in all kinds of areas where people and corporations and governments have to officially transact with each other,” explained Howard. “Venture capitalists are pouring money into startups that are trying to build decentralized cloud storage systems, smart contracts, voting systems, and loyalty programs, to name a few.”

Blockchain is a valuable tool in the security toolbox, “but it is really only one tool,” said Saito. “The distributed ledger really helps create a redundancy to assure that the integrity of the entire system is not usurped by a few bad actors, but the ‘distributed-ness’ of this will maintain that consistency,” he explained. The blockchain could be modified to add authentication and authorization features that make it more secure, but its underlying feature is integrity, the ability to maintain data unmodified.

“Blockchain solves the problem that if you have no central authority keeping everybody honest and knowing who everybody is, how do you trust the other side of the transaction when you are most likely transacting with people whom you don’t know if you can trust?” said Howard.

The ability to simplify trust relationships and validate transactions efficiently reduces the cost and complexity of counterparty trades and reduces personnel overhead needed to maintain, audit, and provide compliance of those ledgers, said Garry Coldwells, senior manager, major accounts, at Palo Alto Networks. Additionally, “the cost of establishing and maintaining blockchains is remarkably low compared with the current model.”

Still some hurdles

Some of the obstacles to adoption remain, namely knowledge and reputation hurdles, which will have to be addressed in 2018. For one, in the public’s consciousness, blockchain is thought to be synonymous with Bitcoin and the other cryptocurrencies it enables and that still carry a whiff of their extra-legal origins. A study released this summer by YouGov found that one-third of Americans had never heard of Bitcoin and 29% thought cryptocurrencies are illegal.

“Cryptocurrency remains a black box and is commonly viewed as a ‘dark net’ entity fraught with risk and thievery” among laypeople, said Coldwells. This lack of regulation does give some pause. Coldwells noted most of the calls for regulation come from established securities houses that stand to lose revenue to cryptocurrencies. But several recent frauds in the market have led to growing talk of regulation, a contradiction to the decentralized blockchain ideal, he said.

Experts also warn about assuming blockchain is completely hacker-proof.  “No doubt, someone will be working to crack it, but that happens,” said IBM’s Rangaiah. Palo Alto Networks’ Saito said it is theoretically possible, as in any system, for a bad actor to take control of most of, many of the systems maintaining the ledger and to code a chain to their advantage, but changing the past ledger entries to match would be harder.

Any such misgivings, however, most likely won’t stop development of blockchain: “Your best research is probably going to be in your own company. Because, right now, someone in your company is looking at a blockchain solution,” said PMG’s Engel. “You can walk down to your IT department and say ‘Blockchain!’ and people will pop out of the woodwork.”