How data acceleration will make the blockchain even more secure

Michael Salmony, executive adviser at Equens, spoke about ‘Making Tea on the Blockchain’ at the Financial Service Club in January 2017. He argued that blockchain is but one solution. Other options for making smart and secure transactions should also be considered. He even goes so far as to ask on Linkedin: ‘Blockchain – not for payments?

Questions like this one are important because so many people have been jumping onto the Bitcoin and blockchain bandwagon over the last few years with the view that it’s the answer to all of their prayers. In some cases it might; in others it might not be.

Blockchain will revolutionise the financial systems overnight, taking away the need for the banks’ stuffy 300 year old way of doing things

In his blog he refers to Satoshi Nakamoto, the creator of Bitcoin, who described in one of his papers “how to make remote payments ‘without a trusted third party’ (like a bank) that are ‘computationally impractical to reverse’.” The problem is that much of the hype around Bitcoin has largely gone away as it has been subsumed by massive episodes of fraud and losses, and internal political wrangles. The analyses of the European Banking Authority and other organisations has also laid bitcoin bare to the point that its volatility became too much. Their scrutiny opens up the fact that there are other opportunities for manipulation and so he claims its flaws become very apparent.

Applying caution

“However, the underlying distributed consensus algorithm now popularly called blockchain still is the subject of heated discussion and massive investments of time and money”, he says before adding: “Normally I am very much in favour of innovations, but in this case I lean towards…being cautious about blockchain for payments (although the discussion around this may be anything but short-lived).”

His caution is based on the following:

  • Blockchain is a solution looking for a problem. He argues that innovation should always put the customer first and not the technology. “People are madly trying to work out what this Blockchain solution could be used for”, he explains.
  • It isn’t new. He says that Blockchain is often praised for its novelty, but points out the distributed ledgers have been around for decades.
  • It isn’t good technology. He comments that some people say that Blockchain is a much better system than what has previously existed. They argue that it maydrastically improve cost, security, speed, and user friendliness compared to current existing systems.

He explains that this often isn’t the case: “Increasingly experts agree that there is little evidence for this – especially regarding the public blockchain that would be needed for global payments. Its major pitfall is that it does not scale well (transaction limits, latency, storage explosion), uses extraordinary amounts of resources (energy, processing power), has severe security concerns and is even surprisingly bad at privacy. Should we really base a critical infrastructure like payments on this?”

He therefore argues that it is becoming increasingly clear “that central entities are actually required in real world blockchain implementations.” As a result of this situation blockchain won’t favour any ideologists whom are in favour of a system without central points of trust – such as banks. This leads to a lack of compliance and to the technology being favoured by darknet users looking to undertake a number of dubious activities. However, banks and financial services institutions have to live in the real world to ensure that they are compliant with Know Your Customer and anti-money laundering (AML) legislation and regulations.

Subsequently they need to provide an infrastructure they can all depend upon. This need for compliance may in turn lead to more technological leadership in the financial services community. This leads to companies and individuals prioritising their own agenda and business decisions concerning business issues and about technologies such as blockchain, API, NFC, quantum, identify, authentication, wearables, and so forth. In essence, what matters is whether a certain technology works in terms of scalability, compliance, cost effectiveness, and proven capabilities.

Changing the world

In contrast to Salmony’s personal viewpoint I think that blockchain technology will likely, maybe, or possibly change the world. It will revolutionise the financial systems overnight, taking away the need for the slow incumbent banks and their stuffy 300 year old way of doing things. For anyone that has been in the IT industry for the last 20 years will know and recognise the hype cycle that tends to happen when a new technology emerges – just look at the internet.

The revamped Gartner hype cycle – Throw VC Money At It, the Peak of Oversold Over Promises, the Trough of Reality, and finally the Gentle Slope of Making It Work in the Real World

Hang on, I hear you say. The internet has changed the world of information, social interaction, consumer purchasing, and so on.  In reality it has shrunk and transformed the world beyond all recognition, but those of us who are ‘long in the tooth’ will remember the hype that went into it in the early days. This involved a lot of money, speculative ventures with mind boggling valuations that really didn’t have at the centre a solid business idea or plan. 

Some of these were just too far ahead of their time. Take for example what author Steven Banks highlighted in his book “The Four Steps to the Epiphany: Successful Strategies for Products That Win”. In it he wrote about the home grocery delivery Webvan. This company focused so much on the back end functions to the detriment of gaining customers – or perhaps the market just wasn’t ready yet.

Technology dèja vu

So what has this all got to do with blockchain? Well, it does have a bit of dèja vu feeling similar to that of the internet where just maybe, the hype doesn’t quite match reality. Over the past 300 or so years, the world’s banking infrastructure has grown up on a basis of trust with traceability, governance, dispute resolution, etc. This postulates that in reality there is no need or appetite within the core business of banking and finance. In fact how is one going to regulate such subjects as money laundering local reporting requirements? The list of compliance issues is quite extensive.

However, the proponents of blockchain technology or distributed ledger technology (DLT) as it is now known, talk of the speed of transactions compared to traditional banking process. With a large DLT the norm for confirming transactions on the original bitcoin DLT is around 10 minutes. This is a minuscule amount of time when compared to foreign currency movements through our traditional banking system that can take up to five days. Well, in our hearts of hearts, we all know that this is not the fault of the underlying technology in the banking system, but percentage skimming by the banking system.

When you consider the sheer amount of money passing through banks each day, holding it for a couple of days before processing it can create some considerable bonuses.  Let’s go over that part again and consider the number of transactions each day on a DLT, which is increasing as performance increases. Firstly, it will never reach the numbers required say for the Visa network that handles on average 47,000 transactions per second or Nasdaq’s potential 1M tps. All this brings into question its scalability. But does this mean that there are no uses for DLT – far from it.

Let’s go back and review that wonderful Gartner hype cycle where they talk about the Innovation Trigger, the Peak of Inflated Expectations  and that all important Trough of Disillusionment. I would like to call them – Throw VC Money At It! People do this in the belief that it will solve everyone’s problem. There’s also the Peak of Oversold Over Promises, then the Trough of Reality, and finally, the Gentle Slope of Making it Work in the real world.

Dot-com peak

Now with these in mind, cast your minds back to the turn of the century in just the same way the dot-com peak turned itself into real businesses. I think we are nearly there with distributed ledger technology despite what a lot of detractors claim that this is a solution looking for a problem.  To understand this it’s important to take a step back, to gain a more pragmatic viewpoint, because blockchain could well be at the heart of many of the trusted transactions in the world because it has some highly valuable features. Much depends on whether it is used in the right manner. 

DLT (blockchain) has some valuable practical usage in markets segments outside of the core banking world where traceability is vital such as in the diamond trading (this could possibly bring an end to Blood Diamonds), fine art, medical records, land transactions and deeds. In fact, the USA grocery giant Walmart is about to enter trials of a DLT for tracking foods from the point of origin all the way through distribution and inspection to the shelf in the store.  Should anything raise the suspicion as to the safety of the items, these can be traced over every single store and the whole supply chain. With this they are looking to provide a greater level of food safety, reducing not only the costs possible litigation but also minimising food wastage.

Security and consensus

Great emphasis has been put on the security of the blockchain with its encryption and its distributed consensus model. For the technology to work on a global scale in a commercial world then the performance and flexibility has to improve dramatically. One of the concerns with the consensus model is about the computing power required. This could lead to the possibility of a minimum number of nodes being concentrated in one region. That happened to Bitcoin in China where 80% of the mining nodes are based.

If the number of blockchains could multiply rapidly globally, it no longer becomes a computational burden but also a data transportation problem

As this technology spreads into other walks of life, not only could the size of the chains increase but also the number of blockchains could multiply rapidly globally, as well as within a single organisation such as Walmart where it has a diverse supply infrastructure. This no longer becomes just a computational burden but also a data transportation problem. 

To maximise the security and performance, the greater the number and diversity of nodes or miners the better, but this leads to a problem of how to transfer this encrypted data around the world in a performant and efficient way. In the past we have used compression to improve the performance of data transmission over large distances, but trying to compress encrypted data is very inefficient. What is therefore needed instead is a technology such as PORTrockIT to enable data to travel more securely and faster than before – making it harder for hackers to gain unauthorised access to even blockchain data. This is a need that the customer wants to be addressed, and it can now be done well.