Mainstream sectors have come to see the value of blockchain and the potential it holds for businesses and governments alike, especially financial services, insurance, logistics, healthcare, travel, law, education and more.
What every sector is beginning to notice is that the option to have a distributed, immutable ledger to record and store everything from contracts to records and data holds great promise of innovation.
But blockchain technology is not without some major challenges. Sectors and even individual businesses are looking at blockchain for solutions and are working with developers for customized blockchain functionality. Many developers/firms are also working on their own to garner a market edge as they see the future of blockchain technology going mainstream.
Still other businesses, in an attempt to move quickly, are “piggybacking” on existing public blockchains. This may or may not hold the ultimate solution for them, because customized, private and permission-based blockchains seem to hold the real promise.
That said, there are a few technologies currently in the works that should resolve current challenges and propel blockchain technology as a far more mainstream business solution.
Solving The Interoperability Challenge
Imagine this scenario. You own Ether and you want to use it to trade for Bitcoin. You cannot send that Ether directly to Bitcoin to make the trade, because the two blockchains cannot talk to one another. You will have to sell your Ether first, exchanging it for a fiat currency and then purchase Bitcoin as an entirely new transaction. The same is true for exchanging different tokens built atop of the Ethereum blockchain. The good news is that the Ethereum platform now includes a standardized protocol for creating new tokens: ERC-2 that solves the interoperability problem of Ethereum-based tokens.
Another solution for crypto trading is to use a third-party “transactor.” There are many of those cropping up globally and the announcement of eToro launching in the US offers just one prime example of this. One of the key features of eToro’s investment platform is its easy usability and while it does have a social media element available to those who want to use it, it can also act like a clearing house, enabling investors to make coin trades with ease without the inefficiency of personal interaction.
But blockchain is moving far beyond these public ledgers for crypto, and here is where the real issues come in. As it moves into use by businesses and governments, private blockchains are being developed, and they cannot “talk” to each other.
Consider this: a citizen of Canada has all of his identification and travel documents stored in the Canadian government blockchain. He can travel about Canada with no paper documents. If he should travel to another country that has its own blockchain, however, he must carry physical documents. Those two blockchains cannot communicate and transfer his documents back and forth.
The same is true for businesses and sectors that are developing private blockchains.
The solution, of course, is for there to be a method of relaying messages, data, and records among separate blockchains, and this is just what many developers are working on right now.
The proposed solutions fall into two categories:
Developing side-chains that connect two or more blockchains together, operated by a third-party with verification of all transactions before they are passed from one chain to another.
Development of what is known as “atomic” swaps, which users themselves control, without the intervention of a third party. Both users must verify a transaction for it to be relayed.
Blockchain To Satisfy Individual Consumer Demands
Currently, consumers who make online purchases must provide their personal and financial information to a third-party processor, and the recent hacking of those payment systems has resulted in a plethora of expense and inconvenience.
While the blockchain technology may not be ready to handle a large volume of consumer transactions just yet, it can serve another important purpose - protect customers’ personal data. As the legislature is changing towards increased data protections, there may be an increased demand for blockchain-based identity management systems that will empower the consumer to selectively give access to their personal and payment data, and preference. Consumers will “own” their own information rather than giving it up to someone else and leaving it open to cybercrime.
Currently, Microsoft is working on a pilot blockchain-based identity management system that will let users secure and control access to their personal and financial information, through an encrypted database.
Alternatives To Current Consensus Algorithms
When blockchain was new, and still today, the verification process occurs by what is called PoW, or proof of work. Miners attempt to solve cryptographic problems, and the one who first hits the solution confirms the transaction and packs it into a block. The reward for this is financial, of course, and so there is plenty of incentive for a miner to get that solution.
But there are clear drawbacks to the PoW consensus mechanism:
It is costly, and miners must have plenty of funds to engage in the activity. With so many thousands of miners working on the same problem, the energy costs are huge; and they also must buy the latest hardware to function competitively.
Centralization of power can occur as well. Miners can set up collaborative agreements that allow them to control a large chunk of the processing power, and the possibility for nefarious action is increased.
For these reasons, some developers have turned to Proof of State (PoS). This model of consensus algorithm and recording is based upon a miner purchasing a “stake” by buying tokens used in the blockchain system. One individual miner is then selected for each new block commitment, usually occurring every few minutes. This eliminates the need for costly equipment and thousands of miners draining energy resources by working on the same problem and the need for such sophisticated hardware is also eliminated. The one drawback here is that miners who hold the most tokens are usually given preferential treatment – the rationale being that the more a stakeholder has, the more he will be incentivized to do it right. He will not attack his own investment.
There are drawbacks to the PoS model too, one of which is that miners will operate on more than one chain. A Delegated Proof of State (DPoS) has been an early modification, but more consensus algorithms are certain to come, as newer technologies continue to be developed. Here are just three other alternatives that may hold promise.
One new consensus algorithm has been developed, now commonly known as Proof of Activity (PoA). It combines PoW and PoS, as sort of a hybrid. It has advantages of reducing the 51% attack risk and it looks to be more secure than either of the other two when used separately. The downside is that resource usage is not significantly reduced.
Proof of Authority: This is actually a centralized system in which transactions are verified by approved “administrators” of a system. Other miners will receive the “truth” from these authorities. This may be a valuable consensus algorithm for private blockchains.
Block Lattice: This is a structure in which each user gets their own chain and only they can write to it. But everyone has a copy of all of the chains. Each transaction is broking into the sender’s and the receiver’s blocks. If the potential for attacks can be eliminated, this might prove an extremely usable algorithm for business-to-consumer and business-to-business transactions.
Clearly, 2018 will bring new innovations and technologies with respect to blockchain. These three plus those to come will all help to push blockchain into the mainstream, both for sectors and individual organizations. It is a classic case of “supply meeting demand.”