Country lessons learned: blockchain - the experience of the first pilot projects

Lessons after the first pilot projects with blockchain

Author: Vladimir Alekseev, Lead Systems Architect, IBM Russia and CIS





After the first pilot projects with the blockchain technology, a small pause arose, which I decided to devote to analyzing the past and try to understand how best to approach the research of the technology and what results should be expected.



As a result, everything turned out to be reduced to 10 main points, which are conclusions from the results of practical exercises in the framework of projects for large Russian banks.

1. Blockchain is truly a new technology on the market.

The first time the blockchain was mentioned in 2008 in Satoshi Nakamoto's article about Bitcoin (Bitcoin: A Peer-to-Peer Electronic Cash System), the technology being described as a timestamp server. And only a few years ago, the blockchain was perceived as a separate technology without being tied to bitcoin. Simplified blockchain can be represented as a distributed registry or distributed storage system of records, access to which is available to any member of the network. All records when they hit the blockchain are formed into blocks that are connected in one chain (the blockchain from English is a chain of blocks).

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According to a rough estimate, the technology has been on the market for no more than 5 years, and large financial organizations began to show more interest and conduct pilot projects just a year or two ago. It is extremely rare to find information about the use of technology in the productive systems of large companies. Conventionally, implementations can be divided into two types: startups or fintech companies whose business line is associated with the blockchain (Ethereum, Everledger, etc.), and pilot projects of large financial institutions around the world. All this shows that we are only at the beginning of the journey and, in fact, create history.

2. Blockchain is more effective not in the framework of one organization, but in the presence of an ecosystem

Despite the fact that there are a number of scenarios for the possible use of technology within an organization (compliance, for example), cases are more effective when information is exchanged between several companies. One of the first areas of research in the industry were the deployment scenarios for the supply chain to the blockchain (an example of car leasing, aircraft assembly), as well as the exchange of financial transactions between banks around the world without a regulator (task within the R3 consortium). From the blockchain, in the first place, more are waiting for changes in the financial ecosystem by reducing or even eliminating the role of the regulator.

3. The business community is the foundation of successful blockchain technology research.

What the blockchain has really brought to the industry is a completely new format of work between organizations. Indeed, before this partnership between companies was common practice (IBM and Apple alliance as an example). Blockchain, one might say, forced organizations to cooperate at the level of research and development (Research and development, R & D), and not so much in the IT industry, but in the financial sector. It is enough to recall the consortium R3, which at the time of its establishment in mid-2015 consisted of 12 banks, and now has more than 40. What makes banks unite and act together? As mentioned in the first paragraph, the blockchain is an extremely new and rapidly developing technology for all market participants. Therefore, it cannot be said that it has a sufficient level of maturity for immediate use in productive systems. It means that it is necessary to explore possible ways of using technology, analyze bottlenecks, problems, advantages. And this is exactly the task of R & D.





It is not without reason that organizations spread the developed code into open communities for sharing with each other. One of the most famous examples is the HyperLedger consortium (created under the Linux Foundation), where IBM has, for example, laid out more than 44,000 lines of code for general use.



The second point why the business community is important for the implementation of the blockchain is the lesson from point 2: the great benefits of using the blockchain will be for the ecosystem of organizations that share information but do not trust each other. Blockchain can significantly simplify and improve the exchange and storage of information within an open or closed community of organizations.



An important conclusion is that if you decided to adapt the blockchain technology in your organization, then actively participate in the discussion within the business community. Due to this, you will be able to contribute your ideas as well as get new ones, find partners and expertise.

4. It is more difficult to choose the right scenario for using the technology than to implement it technically

The experience of the first projects clearly demonstrated that most of the time was spent searching for scenarios (use-case) for further development. And, unfortunately, most of the projects did not have a so-called “wow effect” for business at the end - the question of the benefits of the blockchain remained open. In a number of cases, pilot projects turned out to be only a demonstration of the capabilities of a technical programming team on one of the blockchain implementations. Thus, despite the market’s fears of technology being unavailable for industrial use, it’s more important not to prove the opposite, but to understand what effect the company will receive from the blockchain implementation. And only after that proceed to the technological implementation. Otherwise, pilot projects will be done for the sake of pilot projects.





Conclusion : there is no need to give in to the wave in the market and to make pilots in the blockchain area only for a sample of technology. Technological implementation is the easiest stage of technology testing. You must first accurately determine the possible areas where the implementation of the blockchain can be useful.

5. Blockchain is not only technological innovation.

There is a discussion on the market where to place the blockchain technology - to technological or economic revolutions. The experience of the first pilots showed that organizations expect more qualitative changes in financial processes than they expect to optimize the IT infrastructure as a result of technology deployment. Blockchain is able to bring to the market completely new models of interaction between companies without the participation of regulators, which makes it not just another new technological innovation.



Conclusion : the blockchain is rather a combination of both new innovations in technologies and new approaches in economic models.

6. The greatest difficulties are related to issues of scalability and security.

One of the first issues raised when discussing the prospects for the blockchain is scalability and security.

The issue of scalability is closely related to performance - at the moment it is difficult to predict the speed of computing a new unit in the network for each new implementation. The only known fact in a large-scale implementation is 8 minutes per block for Bitcoin. How much a new block will be calculated in any other network is unknown and testing is needed.





In addition, if the speed and meets the needs, the facts of performance changes, depending on the number of nodes in the network (and this is scalability), remain unexplored.



Questions in the field of security are logical, since if every participant has a copy of the distributed registry, then how to make sure that the data is really correct and cannot be changed?



And, if these or similar issues can be explained by the specifics of the implementation of the technology, on the other hand, the market began to expect that the blockchain is safe in everything and is able to solve all current security problems. This is not true. Yes, the technology has certain protection mechanisms, but this does not mean that it resolves all the issues. You should not assume that the blockchain, for example, uniquely solves the problem of losing primary keys.



Conclusion : you should not consider the blockchain as a solution for highly loaded transaction systems (for example, banking processing) due to the lack of practical knowledge about network performance - currently there are very few examples of implementations or industrial tests. In matters of security, you should not rely on the knowledge that the blockchain is able to solve all security problems - it is recommended to consider the blockchain as well as any other new technology and carefully analyze possible vulnerabilities.

7. The industry is poorly prepared for the use of distributed registries - there is a lack of regulatory measures.

As already mentioned, the blockchain offers organizations a new level of interaction between them - without using a regulator. Despite the prospects for this approach (the creation of “collective responsibility”, reduction of costs during the work of the regulator, etc.), currently the industry does not have sufficient experience in using this approach. Logically, there are no regulatory measures. It is already clear that after successful technical implementation of blockchain technologies, companies are facing regulatory issues and thus inhibit the widespread use of technology in productive systems.



Within the financial industry, the position of the country's national bank is extremely important for successful development of the blockchain. As practice shows, a more effective way for the National Bank to participate in testing the technology is to work together with banks, rather than countering the spread of technology in the market. It is worth noting that a large number of national banks in the world adhere to the position to lead the movement to develop the blockchain, and not to resist this.



Conclusion : for the successful implementation of the blockchain, organizations need to allocate resources not only for process pilots, but also for solving legal issues. And great difficulties are just in the legal field, and not in the technical field.

8. Do not expect lightning-fast return on investment in the blockchain - this is the same technology that requires time to implement and adapt

It is even surprising that because of the rush around the changes that the blockchain can bring to the market (“blockchain - new Internet”), companies have turned a blind eye to everyday issues related to the introduction of any new technology: support, integration with current systems. And, it is necessary to recognize that after the successful completion of the pilot projects, the wave of enthusiasm is sharply reduced, as organizations move to the analysis phase of how to implement the technology. And here there are questions about the lack of staff skills to support, system scaling with increasing load, integration and data exchange with existing systems.





Conclusion : you don’t need to consider the blockchain as a separate isolated part of your IT infrastructure - integration and support issues are still relevant. Already in the initial stages of pilot projects, it is worthwhile to assess the place of blockchain technologies in the overall architecture of the organization.

9. Blockchain may be introduced earlier in non-financial areas.

Of course, the financial sector and, in particular, the banks are most interested in technology. On the other hand, high demand and excitement do not always lead to practical actions and implementations. It happens that banks are addicted to chasing each other, trying to overtake competitors and show innovation more than focus on the successful introduction of technology and the benefits from its use.





In the meantime, quite a large number of startups have appeared that offer blockchain-based services in non-financial sectors. For example, the blockchain can be used to store information about diamonds, on the real estate market, for registering land cadastres, cloud storage of data and accounting for intellectual property rights.



Conclusion : companies from non-financial industries should not wait for the results of the implementation of banks, but begin to look for ways to use the blockchain technology. In the absence of agiotage and in the conditions of the easiest regulatory standards, the chances for successful implementation of the technology may be significantly greater than those of banks.

10. Blockchain - a technology that can really change the industry.

Despite all the market concerns related to the new technology and its unavailability for industrial implementation, the blockchain is able to qualitatively change the banking and not only the industry. Namely, to change the ways of interaction between companies: organizations will have to be able to “negotiate” without the participation of regulatory authorities. Of course, some time must pass (according to various estimates, from 2-3 years) to test the technology, but the fact that the blockchain is promising is clear now.