Getting a Handle on Blockchain

By  | 

The International Data Corporation reports that global spending on blockchain solutions in 2021 will increase to almost $6.6 billion - a 50% growth over 2020. Experts expect spending to triple by 2024, to almost $19 billion. Driving these statistics is the fact that blockchain technology not only underlies cryptocurrency, but is also increasingly used by governments and NGOs worldwide. Examples include the U.S. Department of Health and Human Services tracking Covid-19 hospitalization data and the U.N. World Food program delivering cash aid to Syrian refugees in Jordan. The private sector is also increasing its adoption of the technology, as demonstrated in the banking and shipping industries. But what exactly is blockchain, how does it work, and who are the major players?

A Brief Overview of Blockchain

Blockchain provides an encrypted, decentralized, and verified way to exchange material such as funds, files, and contracts. Blockchain is not hosted in one place. Instead, it is spread throughout the network of participants. It works by first requesting a transaction, then communicating the transaction to a system of computers known as a peer-to-peer (P2P) network. These computers – also known as nodes – use algorithms to authenticate the user’s status and verify the transaction (e.g., cryptocurrency contracts, files, etc.). Next, the verified transactions merge to create a new “block” of data within the digital ledger. The new block is added to previous data blocks to create a permanent and unchangeable chain of data, known as a blockchain. Central to blockchain  is the “consensus mechanism” which helps verify user identities and transactions.  Allerin offers a walkthrough of eight popular options for consensus mechanisms. The speed and volume of transactions that a blockchain can handle are influenced by which kind of consensus mechanism is used, among other factors.

The main advantages blockchain offers are increased security and integrity of information, alongside administrative savings and decentralization. As such, this technology is already widely used by the finance and banking sector for transaction settlement (e.g., J.P. Morgan’s Liink) and digital currencies, the most well-known being Bitcoin. Blockchain solutions are also found in supply chains, as they can be especially useful in tracking products through the process and helping identify the origins of “bad batches,” such as with IBM’s Food Trust project. The versatility of blockchain stems in part from the various types of blockchain structures available.

The Three Categories of Chains

Blockchains can be divided into three categories: public, private, and consortium. Public blockchains have a publicly viewable ledger and are fully decentralized. Most cryptocurrencies operate on public chains. In contrast, private chains are limited to a specific organization and are used for internal purposes such as auditing or records management. Finally, consortium chains are accessible to a set group of organizations that need to exchange information between them, such as hospitals. Since private and consortium chains deal with a smaller number of users, they are more sustainable and cost efficient than public chains.

The development of blockchain technology tends to focus on either the platform or application level. The architecture of blockchain is the platform level – examples of development efforts include the InterPlanetary File System and Sharding, which address high storage costs. Application-level projects are built to achieve a specific purpose – an example is MetaMask, a popular app allowing standard browsers to access the public Ethereum chain.  

Perhaps most interestingly, blockchain allows for “smart contracts.” A smart contract is autonomous code that can be relied upon to execute the terms of an agreement once the stated conditions are met. Smart contracts are a type of decentralized app, also known as DApps, and can be used for many purposes such as moving funds between accounts or changing product prices in response to delivery times.

Products of the Blockchain Market

Even though these capabilities are quite useful, blockchain is not suitable for all contexts. Blockchain is most appropriate for settings where there is a need to coordinate shared information or settle transactions among decentralized actors. As such, it is increasingly common to see blockchain in the shipping, energy, and real estate industries - as well as healthcare and finance. Sellers in the blockchain market tend to offer products for specific chain types. Providers of public chains offer “platform-as-a-service,” delivering tools for developers to make decentralized applications or DApps. Most focus on gaming, trading, and payments (including cryptocurrency).  

Meanwhile, sellers of private chains offer “software-as-a-service.” This includes general support for blockchain network management, but can also be adapted to industry-specific functions like electronic voting or supply chain tracking (examples include the TradeLens consortium built by IBM for Maersk). To compare, private chains have decreased energy costs, increased consensus efficiency, faster processing times, and stronger privacy than public chains. Consortium chains also benefit from serving a smaller number of participants and have reduced transaction costs and data gaps relative to public chains. This variation in product offerings has helped stir interest from multiple buyers.

Blockchain Market: Numbers, Players, and Public Sector Purchases

Industry proponents anticipate that global blockchain and smart contract markets will reach $2.3 billion this year. Major players for public chains include Ripple Labs, the Ethereum Foundation, and (the EOS public chain), while powerhouses for private chains include Amazon’s Managed Blockchain, IBM’s Blockchain, Microsoft’s Azure Blockchain Workbench, MasterCard’s Blockchain API, and J.P. Morgan’s Quorum. Finally, leaders in consortium chains include Hyperledger Fabric (Linux Foundation), Cordo (focuses on financial transactions, led by R3), BlockApps, and the Energy Web Foundation (focuses on tracking and trading environmental compliance credits).

The public and non-profit sectors are also avid customers for these blockchain groups. As mentioned above, the U.S. Department of Health and Human Services successfully launched a blockchain, HHS Protect, to track Covid-19 hospitalization data. Internationally, the country of Georgia purchased blockchain services from BitFury in order to digitize land deeds. The U.N.’s World Food Program has also utilized blockchain services in its Building Blocks program, facilitating the transfer of cash aid to Syrian refugees in a Jordanian refugee camp. These and other programs take advantage of blockchain’s ability to help reduce corruption, provide services to vulnerable populations, and digitize government functions. There will likely be more use cases demonstrating the versatility – and limitations – of blockchain solutions for the public and non-profit sectors.

Conclusion: Blockchain is Here to Stay

For the time being, it seems clear that blockchain technology has sustained interest from a diverse roster of actors. This has allowed the development of sizable markets, parts of which were recently included as a pay-for method in the new U.S. infrastructure bill. While the legislative focus is narrow, Congress seems to be increasingly aware of the value of blockchain technology.


About the Author: 

Edgar Palomino is an Research Associate with the Internet Governance Lab. He is a current graduate student at American University's School of International Service,  studying emerging technologies as part of the International Affairs & Policy Analysis program. His research interests include blockchain policy, technology standardization, and competition within emerging markets. He recently returned from Peace Corps service in the Republic of Moldova, where he promoted technology skills as a Community Development Volunteer.