UPDATED 14:56 EST / DECEMBER 09 2018


Blockchain, often seen as tech’s next big thing, struggles to get traction

When developers at startup Eximchain Inc. set out to build a reliable global supply chain network for companies to find business partners and guarantee the integrity of transactions, they turned to the most likely solution today: blockchain. But as they looked to build the network upon a public blockchain, they quickly ran into a fundamental problem.

Public blockchains are permissionless, meaning that anyone can use them. But that also means big events such as an initial coin offering – a fundraising technique specific to blockchain networks – can overwhelm the resources of the underlying peer-to-peer architecture. As a result, “Every time there’s a big ICO, transactions may not be processed for two days,” said Hope Liu, Eximchain’s co-founder and chief executive. Such delays simply wouldn’t do for enterprise customers.

Eximchain ultimately solved the problem by essentially developing its own version of a public blockchain. But the process took three years and involved choosing from hundreds of available blockchains, testing the network across borders and building a consensus among members about governance and access rules. “The difficulty of launching a new blockchain depends on how many of those components you need,” Liu said. And Eximchain needed all of them.

Eximchain's Liu: Photo: Eximchain

Eximchain’s Liu: ICOs delayed transactions for up to two days.
(Photo: Eximchain)

The company’s experience isn’t unusual. Entrepreneurs who are building commercial applications based upon blockchain are encountering a host of problems ranging from a lack of awareness to scalability issues to regulatory roadblocks. Despite all the hype about the promise of blockchain to streamline everything from real estate transactions to solar energy exchanges, the technology is still embryonic, and many of the institutions that could benefit most are skeptical about the technology or still don’t understand it.

The upshot: Blockchain needs to bust out of its hype phase, and that means a lot of things still need to happen: A ecosystem of tools and services providers needs to mature, promoters need to focus on no-brainer use cases, and companies looking to use it must zero in on those uses with real business value

Otherwise, what was seen until recently as the tech industry’s next big thing, perhaps as important as the internet itself for rewriting the rules of business, could struggle for years to find traction.

Internet parallels

“Today, blockchains have largely been deployed by Ph.D.s for Ph.D.s,” said Sam Kim, CEO of Lucidity, which developed Lucidity, a blockchain-based platform that provides accountability in digital advertising.

“Nobody’s really built anything that works as far as a real industrial solution,” agreed Shidan Gouran, CEO of Global Blockchain Technologies Corp., a blockchain-focused investment firm. Gouran compares the maturity of blockchain to that of the internet circa 1992: There was a lot of buzz, but it was years before viable commercial models emerged.

Blockchain has been one of the most hyped technologies of the last few years because of its potential to redefine the way transactions are conducted across a wide range of industries, taking vast amounts of overhead out of the process and speeding settlement times. It’s best known as the technology that underlies cryptocurrencies such as bitcoin, but its applications are far greater.

A blockchain is a combination of data structure and a protocol that uses a sequence of data blocks containing transaction records that are linked together. A cryptographic hash — which is a string of characters calculated by running content through an algorithm — is assigned by the most recent block and the chain is then distributed to multiple parties.

That means tamper-proof historical records can be created because each subsequent block that’s added to the chain relies upon the previous block. A change to a single existing block disrupts the cryptographic signature of the entire chain and exposes the tampering.

All this enables reliable, secure and trusted records of transactions between multiple anonymous parties to be created, a unique capability that advocates say can potentially reshape nearly any industry in which transactions need to be verified and recorded. For example, blockchain ledgers can remove the middleman from transactions such as stock trades or real estate sales because both trust and anonymity are built into the process. That cuts costs, speeds processing time and all but eliminates the risk of fraud.

“In industries that suffer from processes and decisions being made by a single intermediary, blockchain provides a good opportunity to get rid of the single point of decision,” said Sergei Gorelyshev, enterprise blockchain practice lead at Altoros Systems, a developer of blockchain applications.

“The applications seem endless,” said Eric Larchevêque, chief executive of Ledger SAS, a blockchain security and infrastructure provider. The global blockchain market is expected to reach $7.6 billion by 2024, up more than 12-fold from $604.5 million in 2016, according to Grand View Research Inc.

Blockchain roadblocks

Ledger's Larcheveque: "Applicaitons seem endless" Photo: Ledger

Ledger’s Larcheveque: “Applications seem endless” (Photo: Ledger)

But even though many startups are attempting to apply blockchain in areas other than cryptocurrency, few have gained traction – at least not yet. SiliconANGLE contacted a dozen of these entrepreneurs and heard similar themes from all of them: Lack of awareness, resistance to new technology, regulatory hurdles and the mixed track record of cryptocurrencies are holding blockchain back from achieving its potential.

A few large-scale blockchain projects have taken root. IBM Corp.’s IBM Food Trust network is a blockchain-based platform that’s intended to enhance food safety by providing an immutable record of the lifecycle of food products from the farm to the grocery store. The project has brought together a dozen major produce and food companies from across the food industry. IBM Corp. has also partnered with global shipping company A.P. Moller-Maersk Group on a distributed ledger blockchain platform for supply chain management. But the venture has struggled to enlist partners.

Startups are sprouting up around the world and attracting plenty of investor interest. Research group Diar Ltd. estimates that blockchain and cryptocurrency startups raised almost $3.9 billion in venture capital during the first three quarters of this year, nearly triple the amount raised in all of 2017.

Amazon Web Services Inc. last month gave blockchain a significant endorsement with the announcement of a managed blockchain service for industrial applications and the Amazon Quantum Ledger Database, which is described as a scalable, immutable and cryptographically verifiable ledger with blockchain-like features.

Examples of new non-currency use cases include Open Minerals and the De Beers Group diamonds supply-chain fraud prevention applications. Blockchain platforms that secure voting processes include Voatz Inc. and Polys from Kaspersky Lab Inc. Interested in buying wine? There’s a blockchain platform for that, too, coming from VinX.

However, most fledgling blockchain companies are struggling to gain altitude. Problems range from scalability issues to regulatory impediments to simple mistrust. Many people either don’t understand how blockchains work or don’t believe that a completely secure, anonymous, trusted peer-to-peer network is possible.

In fact, it is. “The technology is mature enough,” said Dave Sikora, CEO of ALTR Solutions Inc., a maker of enterprise data security products based upon blockchain technology. “But as with many early-stage markets, it’s in its hyperfragmented stage.”

ALTR’s secure storage platform is a good example of an outside-the-box use of the technology. Its private blockchain scatters data across a network of storage devices and uses blockchain tokens to find and reassemble records on the fly. ALTR says its approach is impervious to compromise because attackers can never see more than a tiny fragment of data.

Disruptive potential

There’s no question about blockchain’s disruptive potential. Take BitMED, a service developed by Insighter Inc. that aims to slash or even eliminate the cost of preventive healthcare with a radical new model that treats healthcare data as currency. The startup’s blockchain-based service enables patients to anonymously share information with insurers, pharmaceutical companies, care providers and other members of the healthcare ecosystem that struggle to gather clinical data because of a variety of regulations and data consistency problems.

“There’s a tremendous need for high-quality health data,” said BitMED CEO Rishi Madhok. “There’s a huge lack of quality because most data wasn’t meant for mining, but for care or sending a bill.”

BitMED enables patients to exchange tokens — which are essentially blockchain units of currency — for services, most of which are delivered virtually. The tokens correspond to personal but anonymized healthcare information. Instead of collecting payments from patients – a hit-or-miss proposition at best — healthcare providers can sell tokens to companies that want the data. Payment is guaranteed by the blockchain.

But like many entrepreneurial ventures, BitMED encountered numerous challenges when it tried to build its network on top of off-the-shelf blockchain technology. In particular, it doesn’t comply with the Health Insurance Portability and Accountability Act or HIPAA.

“You can break the de-identification. You can’t completely secure it. Patients in Germany have the right to be forgotten,” Madhok said. “These were all issues we had to address.” Ultimately, the company built its own blockchain. “It can swallow you up in difficulties,” he added.

Filament's Clift-Jennings: "We went through this 20 years ago." Photo: Filament

Filament’s Clift-Jennings: “We went through this 20 years ago.” (Photo: Filament)

Many blockchain pioneers draw a parallel to the early days of the worldwide web, when a promising medium spawned some off-the-wall ideas. Early blockchain applications are mostly experimental and technical, requiring specialized expertise to run. “We went through this before 20 years ago when people were asking why someone would want to use the internet,” said Allison Clift-Jennings, chief executive of Filament, a company that builds blockchain networks for “internet of things” applications.

As with the early web, technology gaps are forcing entrepreneurs to roll their own solutions to compensate for problems with scalability, performance and reliability. Lucidity chose the public version of the Ethereum Blockchain as its platform, but scalability was so unpredictable that the company eventually had to build its own scalability layer.

The experience taught developers that there’s a tradeoff between distribution and scaling. “All app developers must balance against how distributed they want it versus how scaled they want it,” Kim said.

Blockchain also isn’t a cure-all. “The only thing blockchains are really good at doing is grabbing a platform and turning it into a commons owned by everybody inside the network,” Gouran said. “All other applications can be done better with a centralized database.”

But there are plenty of cases in which a decentralized approach is superior. Take MonetaGo Inc., which is applying blockchain to the problem of credit fraud caused by traders placing copies of the same invoice on multiple finance platforms in order to generate duplicate financing payments.

The Indian Reserve Bank has adopted the solution as a simpler and cheaper alternative to a centralized invoice exchange. A developer quoted $50,000 just to design a cloud-based system, said Jesse Chenard, MonetaGo’s CEO. A blockchain solution was delivered in a fraction of the time and at a fraction of the cost. Its solution prevents fraud by ensuring that only one copy of an invoice exists.

“With a centralized service, you’ve got a lot of governance and auditing to make sure things are on the level. These things all introduce cost,” Chenard said. “Whereas we produce code, get the code audited and that’s pretty much the end of it.” He expects half the Indian market will have adopted MonetaGo’s blockchain by the end of this year.

MonetaGo hit the market at the right time because the Indian government was searching for a solution to a problem. Selling blockchain based solutions to established industries, particularly those with mature processes and technologies, isn’t as easy. Organizations are loath to uproot legacy systems for technology that isn’t well-understood.

“Everyone agrees blockchain is a much better system, but you can’t go into an IT department and say their core financials are outdated,” Chenard said. One CEO he knows has attacked the problem simply: “He stopped talking blockchain.”

No sex appeal

That’s not a bad idea, considering how little understood the technology is, even the information technology community.

Cygnetise's Pomfret: Don't second-guess the market. Photo:

Cygnetise’s Pomfret: Don’t second-guess the market. (Photo: Cygnetise)

“Mentioning blockchain or cryptocurrency is not sexy to people,” said Raj Sharma, CEO of Health Wizz Inc., a blockchain application that lets people secure and share their own healthcare records. “What they care more about is that it provides the solution.”

That’s why Cygnetise Ltd. chose to position its blockchain-based distributed registry of approved signatories as a complement to – rather than a replacement for – the cumbersome, error-prone and insecure email workflows it sought to replace. Cygnetise could prove that using a blockchain would cut down on paperwork and errors, but CEO Steve Pomfret knew he had to soft-pedal the potential for disruption. “It’s important to avoid doing too much and second-guess what the market really wants,” he said.

“Using distributed processes and systems require changes on a business or even industry level,” said Alteros’ Gorelyshev. “No organization wants to play with revolution. They want managed evolution.”

Blockchain’s reputation has also been tarnished by continuing scandals in the cryptocurrency realm, making it difficult for entrepreneurs to draw distinctions between the technology and its abusers.

“Filament spends a lot of our time educating,” said Clift-Jennings. In particular, the company tries to draw distinctions between blockchain, cryptocurrencies and fraud, which people tend to pour into the same bucket. “Just because a web server may be used for fraud or pornography doesn’t mean that all web servers are being used that way,” she explained.

The rise of initial coin offerings has further complicated matters. ICOs enable fledgling businesses to raise money through a form of cryptocurrency-based crowdfunding that is largely free of regulation and overhead. Some businesses have raised staggering amounts of money this way, but ICOs have also been a magnet for scammers and con artists. ChinaRussia and South Korea are among the countries that have either banned or heavily regulated cryptocurrency exchanges, and the United States has begun to crack down on suspicious blockchain services offering tokens, which are a blockchain’s units of ownership.

Do all of these challenges mean blockchain is headed toward a fusion-in-a-bottle-style flameout? No one seems to be thinking that way. Gouran said it will take at least 18 more months to get tools and standards in place to make it easy for developers to build applications that scale and integrate with each other. Once adoption begins, though, “this is going to grow faster than the internet,” he said.

Standards are on the way, although efforts are challenged by the rapid pace of change in the industry. Representatives from two major standards bodies — the Ethereum Enterprise Alliance and Hyperledger — announced in October that the groups would collaborate on cross-community standards that would solidify in the second half of 2019. The Institute of Electrical and Electronics Engineers and China’s Information and Software Department have also released or plan to release blockchain standards in 2019.

Platform-level scaling solutions such as Plasma for Ethereum and Komodo are currently in development to address the poor performance of blockchains at extremely large scale. On the developer side, application tools for blockchains exist in a riot of smart contract languages and interpreters such as Solidity and EtherScripter, security checking tools such as Securify and frameworks such as Truffle and BigchainDB.

All this suggests entrepreneurs, and their investors, are confident that blockchain could indeed prove to be a game-changer — and they don’t intend to give up until it succeeds.

Image: TheDigitalArtist/Pixabay

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