Many industries are experimenting with blockchain pilots and are even running productive deployments by now. Consortia in financial services, for instance, aim at replacing legacy infrastructure with blockchain technology to speed up and increase efficiency of financial transactions. Due to their dependency on established structures (e.g. technology, processes, regulations), most initiatives pursue “brownfield” projects that involve complex migrations and major coordination efforts.
Blockchain and the Internet of Things
The Internet of Things (IoT), in contrast, can be seen as „greenfield“ without legacy technology and broadly established standards. By 2020, Gartner expects a more than two-fold increase of connected devices to over 20 billion and an IoT market volume of almost $3 trillion . Blockchain technology will largely facilitate the tremendous IoT growth. Why?
IoT leads to a convergence of the physical and digital world. Physical things are thus complemented with digital representations. Securing digital assets and associated rights so far requires sophisticated security solutions and the reliance on third parties in form of centralized rights management platforms or specialized security and trust providers. These centralized approaches are increasingly a limiting factor for IoT. Future applications, such as autonomous cars, smart grids, Industrie 4.0 networks and machine- to-machine communication in general will require autonomous, seamless and highly dynamic transactions between heterogeneous partners in real-time on an unprecedented granular level.
The nascent blockchain technology offers an intriguing solution. It allows to register physical objects and manage associated ownership rights on a global peer-to-peer (P2P) network without the need for intermediaries. Building on research in distributed computing and cryptography, blockchain technology establishes a network of trust and facilitates the exchange of digital assets “in a way where only the owner of an asset can send it, only the intended recipient can receive it, the asset can only exist in one place at a time, and everyone can validate transactions and ownership of all assets anytime they want” . As such, blockchain is poised to become a key enabling technology for major IoT applications, for example:
- Manufacturing: End-to-end data security over the entire product life cycle (product development, assembly, maintenance) to optimize just-in-time supply chain processes and manufacturing capacities
- Smart grids: Management of renewable energy sources to enable P2P energy transactions in distributed microgrids
- Connected mobility solutions: Exchange of individual mobility data and provisioning of secure vehicle-to-vehicle communication for seamless intermodal mobility solutions
- Smart home: Incorruptible identity and management of connected appliances for smart home automation (e.g. energy management)
- Retail: Personal data sharing of preferences (e.g. colors and sizes) for an individualized customer service experience (e.g. product recommendations) and tracking of a product’s provenance based on end-to-end supply chain visibility
Despite the benefits, blockchain technology also entails several challenges. Many IoT applications require a high and fast transaction throughput. The Bitcoin blockchain network currently processes only about seven transactions per second with an up to 60 minutes transaction confirmation waiting period. Moreover, computational complex cryptography causes a high energy consumption per transaction and raises questions of sustainability.
Many IoT applications also require the protection of privacy (for people and objects) – a requirement that only few blockchains guarantee so far. Furthermore, the scaling debate and recent Bitcoin blockchain hard fork illustrate the challenges of a community-based blockchain governance model. New blockchain protocols may be required to fulfil IoT requirements (e.g. IOTA). There is much to do until new protocols will be established.
The blog post is based on the article “Crypto-Property and Trustless Peer-to-Peer Transactions: Blockchain as Disruption of Property Rights and Transaction Cost Regimes?” by Arnold Picot and Stefan Hopf as part of the Helmut-Schmidt-University “Future of Value Creation 2016” conference proceeding publication.