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Straight Talk IT

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With its recent report, "Distributed Ledger Technology: beyond block chain," the UK Government Office for Science has become just the latest organization to put blockchain/distributed ledger firmly on top of the hyped-technology pile. As the level of activity, investment, and hyperbole reaches a fever pitch, blockchain is rapidly being viewed as the cure to all technology ills. Inevitably, the truth is more nuanced, but in a nutshell, blockchain is just one implementation of "distributed ledger" technology that everyone agrees has the potential to do lots of things – even as they are unsure of what exactly those things may be.

Jumping on the distributed ledger bandwagon

The concept of a distributed ledger did not begin with Bitcoin and in computer science terms goes back some decades. At its simplest, the idea is that you have multiple copies of a database stored in different places, and any changes to one copy are automatically verified and copied to all other copies. Unless all of the nodes on the network agree, no changes can be made. Moreover, any authorized changes to the ledger are recorded and cannot be tampered with.

As a way of creating permanent, unfalsifiable records this has a number of attractions, but in the 1980s, computer networks didn't exist in the way that they do now and the computer power needed for the essential verification process underpinning a distributed ledger model on any useful scale was simply not available.

The development of the blockchain as a means of creating and recording the Bitcoin electronic currency established the viability of distributed ledger as a means of conducting, verifying, and permanently recording transactions cheaply, and without the need for a trusted third party. This decentralized, uncensorable network could enable cheap transactions anywhere – but not quickly, and not privately, among other limitations.

For several years now, start-up fintech companies, the development labs in large banks, and financial infrastructures like the Swift interbank messaging network among others have been working to overcome these limitations in distinct areas of financial transactions, and in many instances expanding it into other areas, where a permanent, tamper-proof distributed ledger may be of use.

From this a new web of interdependent ecosystems is beginning to emerge, each addressing one part of the problem, and each bringing its own view of the potential of the technology: for some who have come up through the Bitcoin/blockchain route, the aim is often to replace the existing financial services structure with, at worst, a more anarcho-capitalist model or, at best, a new slew of digital services; for large banks and existing financial service incumbents, their aim is primarily to reduce their costs and improve service capabilities. Development is now expanding into other sectors such as smart contracts, legal documents, and identity services, among others.

The open source nature of distributed ledger technology is now leading to a Cambrian explosion of new technologies, platforms, and indeed blockchains, with ensuing high levels of investment and an ever-increasing level of hype and promise. Now as organizations in all sectors, including government bodies, race to get to grips with the technology, it is likely that the hype may blind many to the fact that other database technologies may be better suited to meet their needs, in a secure and more resource-effective manner. Inevitably, many fly-by-night operators will be rushing towards the blockchain space, eager to make a quick buck, and provide blockchains in any color you like.

At this stage, it would be foolish to call the odds on the ultimate winners, but in each ecosystem – or product/service category if you prefer – leaders are appearing, and the next stage of the development is beginning as newer consortia, such as RCV3 and Digital Asset Holdings, appear with the intention of becoming the technology that binds the different parts of the market together. Distributed ledger and blockchain technology undoubtedly has huge potential that all organizations should try to understand, but a dose of skepticism amidst the hype will be critical to long-term success.

Straight Talk is a weekly briefing from the desk of the Chief Research Officer. To receive this newsletter by email, please contact us.

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