If you transact with people you don’t fully trust, over a network that imposes costs and risks, then blockchain will hit your building in the next three years.
You’ve probably seen some media coverage of Bitcoin recently. Its price explosion in 2017 (from $750 to $17,000) has renewed public interest in blockchain, the underlying technology that powers Bitcoin. So let’s dig into blockchain, especially in the context of buildings and energy. To quote Freddy Mercury of Queen, “Is this the real life? Is this just fantasy?”
We answer four questions below:
- Should I care about blockchain?
- What problems does blockchain solve?
- How does blockchain work?
- How will I see blockchain in my professional life?
Should I care about blockchain?
In short, yes, you should care. Blockchain is already on its way to delivering important benefits to anyone who transacts with parties they don’t fully trust (i.e. all of us):
- Saved time
- Reduced cost
- Reduced risk of tampering, fraud, and hacking
- Increased trust between partners through shared processes and record-keeping
Blockchain is about a lot more than Bitcoin. Your boss, your customers, and your vendors are going to start pounding you with questions in 2018. It’s time to get smart, so you can steer a path that makes sense for your organization and your career.
My guide to this kind of change is Bill Gates, who said,
“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”
What problems does blockchain solve?
The technology is designed to solve a very modern problem: We live in a world of centralized systems that create transaction costs and headaches. For example, when you use your Visa card, you’ve instantly created entries in five ledgers:
Most of the time these ledgers match up, and we love the convenience, but the system is full of grit:
- Transaction problems with auditing, reconciliation, and fees
- System problems with reliability and security
- Market problems with monopolies and lack of service options
What if we could get the convenience of electronic transactions without the grit? Enter blockchain.
When someone says “blockchain”, you should think “Distributed Ledger”, a way to pull transactions out of centralized databases and into the hands of participants. Each participant in a network maintains the ledger of transactions. The genius of blockchain is that it ensures these distributed ledgers are synced up and highly secure. Think of all of the work done by centralized systems to ensure trust. Blockchain does that without the costs and risks of the centralized systems.
In the words of Richard Brown, one of the founders of the financial consortium, R3:
“Distributed Ledgers … are systems that enable parties who don’t fully trust each other to form and maintain consensus about the existence, status and evolution of a set of shared facts.”
If you transact with people you don’t fully trust, over a network that currently imposes costs and risks, then blockchain is for you.
How does blockchain work?
This starts to get technical. You can just skim the two diagrams below to get the basic idea, or dig into the details below the diagrams.
Here’s the current world for most of us, with browsers and apps accessing sophisticated data and tools from a central database.
And here’s how it looks in the blockchain world, where a distributed database is synchronized across multiple nodes without a central manager:
The key elements of blockchain
The simple formulation is that blockchain technology allows connected devices to reach agreement over shared data. Without getting too techy, let’s dig in on those three critical pieces.
Connected Devices are in a peer-to-peer network. If your computer or phone or smart meter is a part of a blockchain network, it is communicating directly to other devices on that network, not through a central server owned by a third party.
Agreement between all of the connected computers is based on a consensus mechanism. One of the challenges of distribution is that the ledgers can get out of sync. Blockchain includes a specific process for managing agreement over time. This is a non-trivial exercise. Any time you see “Proof-of-X” associated with blockchain, you’re looking at innovations designed to improve the syncing process.
Shared Data in the form of a chain of blocks (surprise, surprise). A blockchain network maintains data, transactions, and contracts in a specific format so participants can verify the consistency of a growing ledger. Each new entry must always reference earlier entries, creating a linked chain of data. The links along the chain are encrypted in a specific way, so that if someone tries to change an earlier entry, the whole chain breaks. The consensus mechanism in the paragraph above will then reject that change, ensuring that the ledger remains intact.
The five key aspects of blockchain
IBM is heavily invested in blockchain. They talk about four key aspects of the technology:
- Consensus, i.e. allowing multiple parties to automatically approve new records being added to the ledger.
- Provenance, i.e. maintaining a complete record of who’s owned the asset.
- Immutability, i.e. ensuring that the ledger can’t be tampered with.
- Finality, i.e. holding one single version of the truth across all the distributed ledger
I’d like to add one more:
- Smart settlement, i.e. embedding standard contract terms in the ledger so that exchanges are triggered automatically as events occur (this idea is also called “Smart Contracts”)
How will I see blockchain in my professional life?
Once you start looking into blockchain, you’ll find hundreds of different scenarios where it might apply. To be honest, a lot of these are nonsensical ideas, but here are some that are gaining traction. We give you just a taste of them here, but a quick search on any of these ideas will turn up vendors galore.