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Elasticity

Why IBM Thinks Bitcoin Technology Will Change Banking, Household Appliances

Big Blue is the latest company to bet on an enterprise future on the blockchain.

Why IBM Thinks Bitcoin Technology Will Change Banking, Household Appliances
[Photo: Flickr user Jim Hickcox]

In the latest sign that the technology behind bitcoin is being embraced by the corporate world, IBM says it’s exploring how the cryptocurrency’s shared ledger system can be used in fields from banking to the Internet of Things.

"It’s a completely novel architecture for business—a foundation for building a new generation of transactional applications that establish trust and transparency while streamlining business processes," wrote Arvind Krishna, senior vice president and director of IBM Research, in a blog post Wednesday. "It has the potential to vastly reduce the cost and complexity of getting things done."

The notion of a blockchain was first developed by Bitcoin’s pseudonymous inventor Satoshi Nakamoto to record transactions in the currency without the need for banks or any central authority. All transfers of Bitcoin are announced to the currency’s network of users, and Bitcoin miners are rewarded with newly generated coins for bundling those transactions into specially formatted records called blocks. New blocks need to satisfy certain mathematical properties when taken in conjunction with those already generated, and the complete historic transaction record is known as the blockchain.

The Blockchain, And Self-Updating Appliances

Rival cryptocurrencies like Litecoin and Dogecoin each have their own blockchains, and various projects have experimented with using blockchains to store data besides financial transfer records. A project called Namecoin uses its blockchain to record Internet domain name registrations, and the Ethereum project allows its blockchain to store simple programs called "smart contracts" that can automatically transfer funds when certain conditions are met.

To IBM, which has seen data processing systems evolve from the mainframe-based systems of the 1960s and ‘70s to today’s distributed SQL databases, the blockchain concept might just be the next big thing in sharing data. The company says blockchains future blockchain-based systems could make it significantly easier to share records and execute all kinds of transactions, including those based on more traditional currency.

"We always have our eye out for the next innovation around these things," says IBM Middleware CTO Jerry Cuomo. "When you look at blockchain—that notion of a decentralized database that is peer-to-peer and based on shared ledger and public and private key cryptography with smart contracts—it kind of turns the model on its side a bit."

Cuomo says IBM’s working on proof-of-concept projects with clients in a variety of industries to explore how blockchain technology can make their businesses more efficient.

Companies could store transactions with suppliers around the globe in a shared blockchain, rather than manually exchanging data from separate databases, for example. Car rental agencies could use smart contracts that automatically allow rentals when payment’s received and insurance information is confirmed through a blockchain record, he says.

"When all of these three agreements are out there on the chain, we kind of form the final agreement, which is, it’s yours," he says. "You own this thing for this period of time, or whatever the contract says."

And smart appliances might even be able to use a blockchain instead of a connection to a traditional cloud server to interact with the outside world.

"For instance, a refrigerator equipped with sensors and connected to the Internet could use blockchain to manage automated interactions with the external world—anything from ordering and paying for food to arranging for its own software upgrades and tracking its warranty," Krishna wrote in the blog post.

Before the systems can be used for potentially sensitive transactions, it’ll be important to get privacy and security settings right, Cuomo says, just as cloud computing providers have adapted to storing protected information like health records.

A lot of that will come down to basic encryption of the data stored on the chain, along with some tweaks to existing protocols to make it harder to track who’s doing business with whom based on the cryptographic keys that are used as identifiers.

"You can look over time and say, ‘Hey, every Monday morning, public key A is doing something with public key B,' and, 'Hey, I do something with public key B every Tuesday,’ and you might be able to deduce something from that, which in some cases just wouldn't not be allowed," Cuomo says.

Members Only

And while current projects like Bitcoin and Ethereum have relied on public blockchains where all users are essentially equal, enterprise blockchain projects could use invite-only chains where different users have different privileges to initiate and validate different transactions, he says.

IBM’s announcement of its push into blockchain technology—which Cuomo says has been the focus of research within the firm for at least the past year—follows Tuesday’s news that nine major banks, including Goldman Sachs, JP Morgan, Credit Suisse, and Barclays, are working with tech firm R3 to test and standardize blockchain tools for the financial industry.

Overstock.com, the online retailer that began accepting bitcoin last year, is also developing its own blockchain-based securities trading platform called T0. The company made proof-of-concept sales of so-called cryptobonds through the platform earlier this year to Overstock CEO Patrick Byrne and to financial firm First New York, and says T0 will settle transactions significantly faster than traditional exchanges.

Cuomo says IBM plans to release source code and other data from its blockchain research within the next few months—possibly including an internal flowchart he says the company uses to illustrate when using a blockchain makes sense and when it doesn't.

"A blockchain is the new shiny object, but in some cases, if it’s used for the wrong thing, it might be twice as slow and twice as expensive as using a traditional database," he says.

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