The evolution of blockchain technology

Blockchain is one of the most discussed technologies in recent years. Numerous start-ups, SMEs and international corporations are exploring the possibilities of the technology and examining areas of application, potential and risks.

While some proponents of the technology emphasized its revolutionary influence as early as five years ago, others still do not see any promising application in implementation today.

In 2015, the Fraunhofer Institute for Applied Information Technology FIT was the first German research institute to establish a block chain laboratory to support companies in researching the real potential of the block chain. As early as five years ago, a whitepaper on the fundamentals, opportunities and risks of the technology was subsequently published. With the experience we have gained, we review the findings of that time from one of the most widely read whitepapers on blockchain in this article and consider the opportunities and risks of the technology in 2020.

Blockchain 2015

The birth of block chain technology

Blockchain technology can be used as a trusted layer for information storage and exchange between organizations. After the invention of blockchain to create the digital currency Bitcoin in 2008, there were numerous initiatives to establish crypto-currencies and decentralized systems as a substitute for the institutional banking system. With Ethereum and the introduction of Smart Contracts in 2015, these areas of application have been significantly expanded once again and now range from the automation of asylum processes to certificate management in commodity trading.

Opportunities and risks in the basic paper

Against the background of the lack of far-reaching practical implementations outside the domain of digital currencies and the currently emerging academic environment, the Opportunities and Risks 2015 were developed on the basis of practice-oriented information. As a result, the assessment often turned out to be optimistic, for example with regard to the topic of trust, which was given strong emphasis. Some authors postulated that trust in block-chain-based interactions was no longer necessary.

In addition, most of the opportunities and risks in 2015 were based on the proof-of-work technology of the Bitcoin block chain, while alternative systems were still the exception at that time. For example, the energy consumption resulting from the corresponding consensus mechanism was one of the most frequently mentioned points of criticism. Also a low scalability of the systems was mentioned as a weak point five years ago. Among general challenges in 2015, the non-existence of regulation and lack of legislation in the Blockchain area was also highlighted. Standard systems, which companies could have used to efficiently implement applications, were also non-existent.

Blockchain 2020

Development over the past 5 years

In the past 5 years, the block chain environment has developed dramatically: new technical approaches have been established and established, practical implementations of the technology in industry have enabled new insights. For example, the Ethereum blockchain has undergone significant further development, and various domain-specific blockchain systems have been introduced, with special emphasis on private blockchains such as Hyperledger Fabric. In addition, cross-company consortia have been formed in various industries, which have looked at the possibilities and organizational implications of using block chain technology in various projects. Among others, a pilot project at the Federal Office for Migration and Refugees (BAMF) as well as a consortium around the shipping company MAERSK should be highlighted.

Re-evaluation of chances and risks

Under the given circumstances, the opportunities and risks of the 2020 block chain must be reclassified. Security incidents, for example, have shown that trust in a wide variety of instances, not least in potential interaction partners, is definitely necessary. In 2016, it became known that the world’s first decentralized organization (The DAO) lost a significant portion of the funds deposited by its members to an attacker due to a security incident. Practical projects, which are driven in particular by regulatory framework conditions such as compliance with the DSGVO, have also led to an increasing shift from public block chains to private entities. For example, in projects involving sensitive data, more and more organizations are joining forces in order to apply the advantages of the technology in a closed and thus more controllable environment.

Energy consumption

Also, the energy consumption caused by the consensus mechanism of the Bitcoin block chain is less problematic in newer block chain instances and is negligible, especially in private block chain systems where efficient consensus mechanisms can be used due to the differentiated basis of trust. In the same context, the low scalability could also be at least partially counteracted – while the Bitcoin block chain could only process a few transactions per block, more modern systems with more efficient consensus mechanisms are able to handle noticeably more transactions.

Practical tests have also shown that the block chain technology requires a change in thinking in terms of governance. While the above mentioned MAERSK project initially had difficulties in attracting new members, an increasing decentralization of governance independent of the founding companies has led to more companies participating in the consortium. A high number of participating organizations in block chain systems usually also increases the added value of any solutions, as the technology is based on collaboration. In addition, there has also been a clear development in terms of regulation – both initiatives and concrete legislation have developed at regional, national and transnational level. The latter particularly cover the area of crypto currencies.

Standard software and collaboration

One of the main problems in establishing block chains in recent years was that companies often tried to implement block chain use cases themselves. At the same time, the market of service providers offering standardized block chain solutions consolidated. Companies often find it difficult to keep an overview. It is therefore advisable in this case to consult neutral authorities to evaluate and select the service provider or software. This procedure is particularly suitable for use cases in which block chain is part of the solution, but not the central component of the value-adding activity. Almost always several organizational units or partners will be affected by the use case. For this reason, it is important to work with affected parties from the beginning, because the benefit of a block chain use case usually increases with the number of participating organizations.

Opportunities with the focus technology SSI

New concepts of digital identities, and in particular that of Self-Sovereign Identities (SSI), are often based on block chain or make use of the technological properties. In the future, digital services could thus be used in a striking way by “Log-in via SSI” without the user having to transfer data to a third party provider.

Progress in this area gives rise to hopes for applications in the near future and suggests great opportunities for the Internet of Things and the integration of end customers through digital services. Companies are now well advised to prepare their systems for connection to digital identities and to create appropriate interfaces. In this way, the final transition from block chain to real use cases can be mastered: from an infrastructure technology that has come to the fore to an infrastructure technology that enables completely new business areas, products and services.