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The Bitcoin Blockchain: The Magic and the Myths Published: 8 April 2016 ID: G00295779

Analyst(s): Ray Valdes, David Furlonger, Fabio Chesini

Blockchain technology derived from the Bitcoin stack promises much in the era of digital business. Senior executives and CIOs must understand its scope of choices, limitations and lack of maturity before making strategic investments.

Key Findings ■ The Bitcoin blockchain is currently the primary mechanism for implementing a decentralized,

distributed ledger of cryptocurrency transactions — although alternatives are underway.

■ Blockchain technology could reduce transactional friction but, in its current form, suffers from significant limitations in scalability, governance and flexibility that must first be addressed.

■ A contagion of "blockchain fever" has struck the financial services sector, and Gartner clients in other sectors are asking whether it is "too late" to join. The answer is — it is, if anything, too early.

■ There is a contradiction between the requirements of a private blockchain and the capabilities of public blockchain, which result from its original purpose of creating a value-exchange system that is resistant to control by a single central authority. This will be an ongoing tension, similar to the dynamic between public and private cloud.

Recommendations ■ Develop investment plans that accommodate a 90% failure rate for blockchain initiatives over

the next two years, and focus as much on lessons learned as on business value delivered.

■ Consider only tactical narrow-scope deployments of blockchain technology in the short term, accompanied by understanding that these will have a useful life of at most 24 months (at which time they will be replaced by more evolved alternatives).

■ Create a strategic evaluation framework of alternative blockchain platforms that weighs aspects and capabilities, including architecture, stack components, security track record, use-case applicability, performance, and the perceived viability of technology providers.

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■ Conduct innovation workshops within your organization to review and assess how different ledger designs can best address particular business use cases.

■ Use blockchain initiatives as a catalyst to promote and pursue open architectures, to harness the value of networks and business ecosystems, and to prune redundant, inflexible or obsolete systems and processes.

Table of Contents

Analysis.................................................................................................................................................. 2

Breaking the Usual Pattern of Enterprise Adoption............................................................................3

What Is the Blockchain?................................................................................................................... 4

Four Different Uses of the Term...................................................................................................5

The "Magic" of the Blockchain.......................................................................................................... 5

Myths About the Bitcoin Blockchain................................................................................................. 6

Why Financial Services Companies Are Interested............................................................................ 8

Private Versus Public Blockchains.................................................................................................... 9

Bitcoin Stack's Key Advantage Over Alternative Metacoin Platforms.............................................. 10

What the Blockchain Is Good For................................................................................................... 11

Forecast for the Bitcoin Blockchain.................................................................................................12

Gartner Recommended Reading.......................................................................................................... 13

Analysis Escalating requirements in digital business for increased speed, agility and diverse forms of value exchange, amplified by widespread adoption of the Internet of Things (IoT), mean that current financial, legal and technology infrastructure will prove commercially inoperable over time. This will require global-scale platforms for value exchange, which Gartner calls "metacoin platforms," but the current industry vernacular is "blockchain technology." Blockchain refers to the distributed ledger of transactions maintained by a peer-to-peer network (in its current form), but also, more broadly, to a programmable platform that supports diverse forms of value exchange.

The primary instance of blockchain technology is found in the Bitcoin stack — measured in terms of longevity, market share and ecosystem. Bitcoin is both a digital currency (when used in lowercase, by convention) and a technology/protocol stack (when the first letter B is capitalized) that has gained a lot of visibility in mass media. While the currency has fluctuated in value and represents an infinitesimal portion of global payment activity, the technology that creates the distributed ledger — the authoritative open record of currency transactions — has captured the imagination of many in the financial industry.

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Starting in August 2015 and continuing until the present, there are many indicators that "blockchain fever" has struck in a big way, primarily in the financial services sector, but also in other industries and in government initiatives. In that same period, Gartner client inquiries on blockchain and related topics have risen fourfold.

One prominent example of blockchain activity is R3, a consortium of around 45 of the world's largest banks that seeks to develop standards and direct funding toward industrywide challenges

that the blockchain may address. 1 In addition to the consortium, there are separate initiatives

launched by other institutions, including Santander Group, BBVA, Citi, Nasdaq, Goldman Sachs, Barclays and the Commonwealth Bank of Australia.

The Open Ledger project was also announced in December 2015, under the auspices of the Linux Foundation (see "Linux Foundation and IBM Join Trend to Advance Blockchain Technology"). The project has the backing and participation of some large industry players, and vendors such as IBM. The vision of the project goes beyond financial services, to build a distributed ledger "fabric" that can be modified and applied to meet the needs of other industries.

Other indicators of blockchain fever include that the blockchain sessions at the SWIFT International Banking Operations Seminar (held in October 2015 in Singapore), were standing room only. Microsoft introduced a "blockchain as a service" offering to its Azure cloud platform in November 2015. In Japan, prominent financial services company Mizuho is conducting its second blockchain trial in the area of syndicated loans. In February 2016, the government of Dubai announced a government research council to study blockchain technology.

Many of the projects mentioned are in the early stages. They are lab experiments, pilots, proofs of concept, or statements of intention. There is rapid adoption of the blockchain concept, but not so much of the real technology. However, as in past waves of technology adoption by the enterprise sector (for example, cloud computing, Web and enterprise social computing), adoption of technology follows adoption of the concept.

Most blockchain initiatives diminish the role of the cryptocurrency, while emphasizing the distributed database aspects. At present, however, this is mostly a theoretical direction that has yet to be proven in real-world production.

Breaking the Usual Pattern of Enterprise Adoption

This explosively rapid adoption of the blockchain concept is in contrast to the usual slow adoption cycle of enterprise IT. Outside the scope of the blockchain technology, in the general category of enterprise IT products, the many enterprise-oriented technology vendors struggle to achieve even modest market traction in a sector that is too often characterized by:

■ Glacially long purchase cycles.

■ Heavy reliance on proven technology from large, established vendors.

■ High-friction requirements for regulatory compliance.

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http://r3cev.com/

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■ Strong emphasis on capabilities for management and control (in terms of risk management and security, often at the expense of cost, complexity and agility, for example).

■ The requirement for mission criticality, which also drives up cost and complexity.

In contrast, in the case of blockchain adoption, it seems the usual playbook has been thrown out the window. Blockchain technology enjoys explosive growth in interest, despite what would, in the case of other categories, be considered insurmountable obstacles, including:

■ Lack of a known author of the technology (the ostensible author is the pseudonymous Satoshi Nakamoto, which may refer to an individual or a group of developers, but in any case has not been heard from for several years).

■ Lack of any well-known, reputable vendor to provide support.

■ Association with illegal activities (including the purchase and sale of illicit goods on Silk Road and its successor sites) as the primary use case (in perception, if not necessarily in fact).

■ Open-source code maintained by a small team (less than a dozen), which has fragmented allegiances, divergent motives and insufficient governance.

■ A radical and arguably idealistic reimagination of value creation and exchange.

■ An architectural foundation that is diametrically opposed to the current mechanism of commercial facilitation that is more than 300 yearsold.

On top of these challenges, and as part of certain design goals relating to decentralization, the technology is burdened by significant scalability limitations, which are exacerbated by governance problems. These challenges and limitations were delineated over a year ago in Gartner research, and have recently been widely discussed in the cryptocurrency community. Although there are would-be replacements or refinements to the Bitcoin technology stack, these emerging alternatives are unproven and mostly not yet in production.

What Is the Blockchain?

It is important to understand what the blockchain is and what it is not. This section focuses on the Bitcoin implementation of distributed ledger technology because the Bitcoin blockchain is the first, the most mature, and by far the most dominant technology. All the would-be replacements from about a dozen competing early-stage initiatives will be measured against the original.

The Bitcoin blockchain is the globally distributed ledger of transactions for the Bitcoin digital currency. It is the authoritative record of Bitcoin transactions, and is not stored in, or controlled by, a central server. Instead, the data is replicated in toto across the entire peer-to-peer network of thousands of Bitcoin nodes. The data model is very simple, and consists of a "flat file"-style linear list, where transaction records are appended in an ongoing fashion, indefinitely throughout the lifetime of the ledger.

Transactions are not added one at a time, but rather in groups, as many as will fit into a storage block of a certain size (currently 1 megabyte maximum). Each block of transactions references the previous block, hence the name blockchain, for this kind of distributed ledger. The chain structure,

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where each block contains a cryptographic hash of the data in the previous block, ensures the integrity of the entire dataset.

Each transaction record consists of a small number of data fields, the minimum necessary to define and support the currency. The blockchain authoritatively records a transaction, namely that entity A (defined by a Bitcoin address, which is digitally signed) sent a certain amount of bitcoins to entity B (there can also be multiple inputs and outputs), at a specific date and time. Additionally, the transaction record incorporates limited scripting mechanism (intentionally limited in scope) that can associate and specify certain dynamic behaviors to support scenarios such as multisignature transactions.

Four Different Uses of the Term

A major factor behind the confusion in discussions about the blockchain is that people in the same conversation are using the word "blockchain" in different ways.

There are four ways the term is used:

1. In the very specific sense of the distributed ledger mechanism used in the Bitcoin technology stack.

2. In a somewhat more general sense, referring to competitors to the Bitcoin stack (such as Ethereum, Tendermint, Eris, MaidSafe, Ascribe, R3, DAH, Blockstream and Chain) that have implemented their own distributed ledgers (to varying degrees, because not all of these are direct competitors).

3. Rebranding an older technology (for example, a 10-year-old distributed database) with the word blockchain to make it appear modern — a process that has been called "blockchain washing."

4. In the sense of a futuristic, "magical middleware" in the cloud that has advanced databaselike capabilities, such as a sophisticated query facility, a flexible data model, fully programmable scripts (similar to stored procedures), advanced monitoring and management capabilities, and a full complement of reporting functions. Such a system does not exist, and is unlikely to exist in the form that is envisioned.

The "Magic" of the Blockchain

Many discussions of the Bitcoin distributed ledger make blockchain technology seem magical, especially when offered by some proponents who don't fully understand the mechanism and its limitations. However, the technology does have some powerful and innovative aspects that can be considered magical — in the sense that the technology stack is a collection of pre-existing techniques (cryptographic hash, public key encryption, Merkle tree data structures or proof of work, for example) assembled in a nonobvious manner, to produce revolutionary (in terms of commercial/ industry potential) results.

If the blockchain were a data structure running on a single computer under the control of a single program, implementing it would be an exercise for a university student in computer science. The

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magic of the blockchain, therefore, is that it constitutes a sound, proven, effective mechanism for achieving distributed consensus in the face of an untrusted, unreliable networked environment with a dynamic collection of untrusted participants. The blockchain allows untrusted (and semianonymous) parties to collectively create a trusted, authoritative record. In computer science, this is known as the "Byzantine Generals" problem (the generals in a hypothetical military campaign that need to achieve consensus about action, but are not all fully trusted). The collection of untrusted parties can be globally distributed, with dynamic membership — meaning that nodes on the peer-to-peer network can join and leave the group at any time.

A distributed computing algorithm solves the Byzantine Generals problem by incorporating into the system design the notion of "bitcoin mining" (a structured process for adding transaction records to the blockchain, in return for monetary reward). This incentive structure is inherent to the Bitcoin blockchain (although not necessarily present in competing blockchain approaches). The Bitcoin design couples the recording of data in a distributed ledger, with the reward, which means that one cannot use the blockchain without taking into account the role played by the Bitcoin cryptocurrency token.

Although the Bitcoin blockchain represents an impressive technical feat, combining the system has significant limitations, to the point where some of these can be considered design flaws, such as:

■ Scalability (a theoretical maximum of seven transactions per second for the entire system, plus the need to replicate the entire ledger in every node in the network).

■ Speed (a minimum delay of 10 minutes in confirming transactions).

■ Confidentiality/transparency (all transactions amounts are public)

■ Governance (no clear structure for decision making, heavily dependent on individual personalities).

■ Manageability (no built-in mechanisms).

■ Transaction finality (transactions are probabilistic rather than absolute).

■ Lack of resistance to centralization (80% of mining power is controlled by just four organizations, all based in China).

■ Contradiction with respect to existing legal, accounting and taxation frameworks and rules.

These limitations have been discussed in previous Gartner research (see "Maverick* Research: In a Post-Bitcoin World, Metacoin Platforms Enable the Programmable Economy").

Myths About the Bitcoin Blockchain

Although there are undeniably positive aspects to the blockchain, there is also much misunderstanding and confusion. Common myths and misconceptions persist, specifically about the Bitcoin blockchain, but also to some extent with regard to alternative blockchain technologies.

These are:

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■ Myth: The blockchain is a magical database in the cloud. The reality is that it is not a general- purpose database. Instead it is conceptually a flat file, a linear list of simple transaction records. The list is "append only," so entries are never deleted, but instead the file (currently about 50 gigabytes) grows indefinitely and must be replicated in every node in the peer-to-peer network (thereby introducing scalability and latency issues).

■ Myth: The integrity of the ledger is defined by the majority of nodes in the peer-to-peer network. The reality is that it is the majority of "hashpower" (the computational resources used in data mining), not the number of distinct nodes on the network. This means that a single sufficiently powerful entity on the network can "outvote" the rest of the nodes.

■ Myth: The ledger represents an irrevocable record. That is pragmatically correct in current form but, as mentioned earlier, it is theoretically possible for a party to accumulate enough hashpower to rewrite the record, all the way back to the Genesis block (the first block of a blockchain). Such an action would work against the incentives of the usual participants in the Bitcoin ecosystem, because it would destroy all user confidence in the blockchain technology and the commercial economy it supports. However, a nation state or other organization that has an agenda outside the scope of economic transactions, could invest an estimated $400 million (a modest sum, for this type of actor) to deploy enough hashpower to allow the blockchain to be rewritten since its inception (this does not mean that a malefactor can create new transactions, but rather that certain transactions can be left out or double spent).

■ Myth: Blockchain technology is scalable to the level of a global economy. This is now becoming less of myth, and more a widespread perception, as people increasingly become aware of the scalability issues relating to the current form of the Bitcoin technology stack. The key scalability limitation is that the network can only handle, by design, a relatively small number of transactions per second. This number is due to the constraint of a maximum block size of one megabyte, combined with around a 10-minute confirmation delay per block, which, depending on the average transaction size, results in a maximum capacity of seven transactions per second (tps). Actually, due to the increasing size of transaction records, this number has been decreasing and is now estimated at less than three tps, a small number compared to the peak capacity of say the Visa network at 47,000 tps, or Nasdaq's potential of 1 million tps.

■ Myth: The blockchain can be decoupled from the currency or digital token. Some banks considering blockchain technology say: "We don't care about the currency, we only care about the blockchain." The reality is that, in its current form, bitcoin currency is a key part of the blockchain. The blockchain is simply a list of bitcoin-denominated transactions. Also, the design of the consensus mechanism relies on the currency providing the incentive for miners to confirm transactions. Therefore (as some members of the Bitcoin community have said) anyone who states that the currency is not important and can be ignored in favor of the blockchain, does not fully understand the technology and how it works. It is possible to arrive at designs for distributed ledgers that don't rely on a monetary unit, but these designs should be considered experimental.

■ Myth: Bitcoin transactions are anonymous, instantaneous and absolute. In the Bitcoin technology stack, participants in transactions are pseudonymous. Regarding transaction speed, there is, by design, a minimum 10-minute latency in confirming transactions, and pragmatically

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(for high-value transactions) one could wait for an hour for confirmation. Transactions on the blockchain are probabilistic rather than absolute, in that it is theoretically possible for an attacker to build an alternative chain (a data fork) that would allow double spending. Unless the attacker has a majority of hashing power, this will not succeed.

■ Myth: The blockchain is a decentralized system. Although the vision of the original design was one of a decentralized, peer-to-peer network, in practice the system has become more and more centralized. The number of peer-to-peer nodes on the network has dropped steadily at about 15% per year. Mining is conducted in large part (about 80%) by only four mining pools, which are all based in China. Any two of these four could theoretically collude and would together constitute a majority of the computational resources (hashpower) needed for mining, and could then control the updating of the distributed ledger. Additional centralization aspects of mining are the need for specialized application-specific integrated circuits (ASICs) from a small number of suppliers, and for large amounts of electricity (usually from some kind of centralized facility).

Why Financial Services Companies Are Interested

Despite these issues, major banks and financial services companies are in a frenzy of adoption analysis.

The industry's response is at three levels:

1. Discussion-centric and investigative knowledge gathering, often from informal or "untrusted" sources.

2. Institutions establishing proofs of concept run by centers of innovation within the organization — this is limited to Tier 1 institutions.

3. Investments in accelerator and incubator programs to foster financial technology startup activity, often in conjunction with venture funding. There are multiple reasons why financial institutions are interested in the Bitcoin blockchain and in other similar distributed ledger mechanisms:

■ To control and thwart potential disrupters: This is the biggest motivator by far. Banks closely track any technology or system that can potentially disrupt their existing franchises and business models (including payments, lending and foreign exchange). The slogan expressed at one major bank is: "We should disrupt ourselves before allowing a new entrant to disrupt our existing businesses."

■ Potential savings in infrastructure and operational systems: Regarding interbank transactions and settlement, banks have to operate redundant systems (each bank maintains its own set of records), and there is a significant amount of manual process in terms of reconciliation and compliance checks. Santander InnoVentures in collaboration with Oliver Wyman and Anthemis Group, released a study in June 2015 that estimated that distributed ledger technology could be saving the bank between $15 billion and $20 billion per year by 2022, by reducing the infrastructure costs required for cross-border payment

processing, securities trading and regulatory compliance. 2

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■ Expanded scope of business/market use cases: The power, flexibility, reduced cost, proof of work/indisputable verifiability of counterparts, architectural openness and rapid execution time of blockchain technology (when compared to traditional banking systems) can, in theory, support a wider set of use cases. This includes ones that leverage future- oriented capabilities in metacoin platforms, by using Turing-complete (full strength, equivalent to any programming language) programmability for simple smart contracts, to more complex fully fledged distributed applications. A detailed discussion of business use cases will be addressed in an upcoming research note.

Private Versus Public Blockchains

A key issue in industry discussion is the contrast between private versus public blockchains — also known as permissioned ledgers (as opposed to "permissionless" ledgers). Financial institutions see the disruptive potential as well as the potential positive benefits of metacoin platforms, but cannot accept the Bitcoin technology stack in its permissionless form, due to the threat this poses to their intermediated value chains. Also, some of the scalability issues mentioned earlier can be mitigated by going to a different model. Therefore, initiatives have been launched to develop alternative stacks that implement permissioned ledgers or, equivalently, private blockchains.

Understanding these concepts is critical. The Bitcoin blockchain (and the rest of the metacoin protocols) facilitate permissionless ledgers that, in turn, facilitate innovation in the context of digital business. These ledgers form the basis for a new economic system — the programmable economy. It is Gartner's contention that digital business, amplified by the IoT, will be commercially inoperable using current financial and legal systems. Adding algorithmic and programmable capabilities to things that have autonomy, and are connected to the Internet, provides for a whole new economic environment and new stakeholders — such as "distributed autonomous organizations" — to be developed. Permissionless ledgers mean that anyone (or, in theory, any "thing") can set up a node in the peer-to-peer network, and participate in value-creation and value-exchange activities without having to get approval from a central authority or government. This is similar to the Internet and the World Wide Web, where anyone can set up a Web server and connect to the Internet, and there is (almost) no requirement to get the blessing of a central authority or government in the majority of countries. In its truest form, therefore, the Bitcoin blockchain is a permissionless ledger that facilitates this connectivity and, as a consequence, value transfer.

However, financial institutions are turning their attention to private blockchains (for interbank payments and settlement, for example) in an effort to maintain a closed, stable group of known participants who have authorization from centralized organizations (regulators and governments). This would ensure financial institutions continue to manage counterparty risk, customer identities and legal accountability, compatibility with off-chain assets such as securities and titles, and no reversals (settlement finality). It also critically enables the institutions to set and control pricing structures and fees for such intermediation.

To some observers, the notion of a private blockchain appears to be a contradiction in terms, because the permissioned ledger is trying to layer certain capabilities on top of a foundation that was designed for the opposite (trusted versus trustless ecosystems), or at least orthogonal, use cases (central versus distributed control). CIOs who remember when cloud computing was

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emergent recall a similar discussion of "private versus hybrid versus public cloud," and commentators are pointing out how private cloud was something of a contradiction (a discussion that is still ongoing).

While some respected members of the cryptocurrency community have joined the march toward a private blockchain, as part of the R3 consortium, others have stood back with a skeptical stance.

They have raised two main objections:

■ First, the Bitcoin technology stack, in order to meet its goals for permissionless innovation and censorship-resistant records (where transactions can neither be reversed, nor filtered out, for example), has had to compromise in areas of scalability and performance. Therefore, building a permissioned ledger on this foundation is suboptimal, because it is burdened by constraints that are not relevant to the use case of a private blockchain. In effect what is required by a private blockchain might simply be a centralized, database-driven application that trusted members can access.

■ Second, a new technology stack must be conceived and implemented if the Bitcoin technology stack is set aside. This new technology stack should have a host of additional capabilities (including a flexible data model, reporting and monitoring, user identity and access management). These additional capabilities introduce complexity, depend on yet-to-occur innovation, and require new code to implement. This poses the risk of significant security flaws, as would be the case with any complex software system. These security risks are intensified due to the monetary focus of the system, which means large incentives for malefactors to hack it.

Bitcoin Stack's Key Advantage Over Alternative Metacoin Platforms

The shortcomings of the Bitcoin technical architecture have led others to propose and to create alternative metacoin platforms that differ in important ways, such as how transactions are confirmed via mining (proof of work, participation and proof of stake) or collective agreement (consensus), the speed of transaction confirmation, the confidentiality of transaction data, customizability for business/market use cases, and so on.

Gartner prefers the term "metacoin platforms" to "blockchain," because these do not necessarily use blocks in a chain, and are more than a ledger (a record of transactions) but constitute a programmable platform.

One key strength of the Bitcoin blockchain over newer alternative digital currency technologies is that the Bitcoin technology stack has been in production, live on the Internet, since January 2009, functioning almost flawlessly and without any security-related hacks.

The Bitcoin blockchain ledger records transactions and thereby instantiates the value of bitcoins. The aggregate value of bitcoins kept in the ledger has been as much as $12 billion, based on the peak exchange rate reached on November 2013. At present, the value is approximately $5 billion.

This value represents a huge reward for any party that would seek to capture this by "hacking" the blockchain. However, over seven years, the Bitcoin blockchain itself has never been compromised.

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The core Bitcoin technology stack has functioned with near-flawless operations over its lifetime, a track record that is unprecedented when compared to complex software from commercial vendors. By contrast, software packages such as Internet Explorer, Adobe Flash, Microsoft Windows, Oracle Java, and many others, have suffered from an ongoing series of bugs and security holes throughout a period of years — even though these are not directly tied to monetary transactions (giving less incentive to the hackers). However, the security track record of third-party software in the Bitcoin digital currency ecosystem is dismal. Many exchanges (such as Mt. Gox) have been hacked — or funds have been stolen — due to a combination of unskilled programmers, poor methodologies, and perhaps some criminal intent to defraud from the start. The situation is analogous, in the nondigital world, to a poorly run credit union or bank going bankrupt; such an event would not call into question the core mechanisms of a dollar-based economy (or other fiat currency not backed by a physical commodity).

Because of the near-flawless track record of the Bitcoin blockchain and core stack, developers of competing metacoin platforms and technology stacks will have significant work to prove their capabilities to support mission-critical contexts in this regard.

What the Blockchain Is Good For

As mentioned earlier, Gartner increasingly gets questions of the form, "Is it too late to begin a blockchain initiative?" (Answer: No, it is, if anything, too early). Other important questions are: "What is the blockchain good for? And what are worthwhile use cases?"

Comprehensive answers to these questions are beyond the scope of this research, but it is possible to identify the key characteristic of the blockchain: a globally distributed, authoritative, irrevocable record of events (these are generally transactional events, but could be some other kind of interaction between parties, or some other kind of value exchange), without the need to rely on a central authority or government.

These characteristics could generate business use-case examples such as:

■ Digital notary or time-stamped records. Records can be land title registries, medical records, financial investment records, and so on. These records need to be updated by different parties, not just across organizational boundaries, but also national boundaries. These multilateral transactional workflows do not have a single center of gravity (not just a government, but perhaps a large supplier in a business ecosystem). Instead, there are multiple centers of gravity, with none dominant. One project that will use the blockchain as the immutable record of

ownership is the land title registry for the government of Honduras, announced in early 2015. 3

This is intended to provide a trusted and incorruptible public record in a situation where there is mistrust of the deeds managed by the central authority (given the possibility of altering records in the legacy system by corrupt administrators).

■ Another record-keeping scenario is the Nasdaq use of blockchain technology to record private

market transactions among pre-IPO companies. 4 This initiative was also announced in early

2015.

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■ An area where blockchain technology can provide new forms of value is in managing complex, fragmented, distributed supply chains, especially in the context of fraud prevention. The blockchain is a mechanism to track disparate flows of goods, payments and information across organizational and geographic boundaries. This kind of use case would be particularly apparent

in the context of the IoT and the fluid management of physical and digital assets. 5

Organizations should proceed not only by identifying use cases, but also by assessing how the usage of distributed ledgers fits within existing customer experience paradigms, regulatory frameworks and jurisdictions.

These initiatives highlight an interesting dilemma for the industry. Governments and regulators around the world are fostering financial technology innovation undermining parts of the traditional financial services provider franchise. Those same governments are also keeping the screws on traditional providers via regulatory oversight that increases cost and reinforces operational constraints.

Financial services providers therefore predominantly see innovations like the blockchain as a significant threat in terms of removing their intermediated control over the market and destroying revenue streams. However, leading players also see the blockchain as an opportunity to either reassert ecosystem control (via permissioned ledgers, for example) and/or as a means to radically change the cost structure of their operations — creating a competitive gap between themselves and fast followers.

Consequently, CIOs and business leaders need to gain a clear understanding of the maturity and viability of blockchain technologies and the implications for their business, customers and the industry as a whole.

Forecast for the Bitcoin Blockchain

It appears that the era of blockchain proliferation has just begun (see "Hype Cycle for the Programmable Economy, 2015"). There are multiple organizations implementing technology to address related but distinct goals. There are vendors and organizations (including Ethereum, R3, Hyperledger, DAH, Chain, Ripple, Stellar, Tendermint, Eris, and MaidSafe), that see the limitations and shortcomings of the Bitcoin technology stack, and are either trying to address those (for example, Blockstream introducing the concept of side chains) or instead seeking a wholesale replacement of the Bitcoin stack. Some have implemented a demonstrable or beta-stage system, while others are still assembling components or considering the best architecture.

Each of the major blockchain initiatives has enough momentum that they will not disappear overnight. Therefore, through the next five years, there will be multiple blockchains operating in the domain of digital business and laying the foundation for the programmable economy. These will have fragmented and overlapping architectural scopes. Some will be vertical in focus, others horizontal by design. There will be limited interoperability between the blockchains at best. This technology fragmentation will lead to a call for standards, but whatever standards are created, they will have only limited success due to the rapid pace of evolution of this technology, and the difficulty of implementing such standards in the financial services industry. Over time, the number of competing metacoin platforms will diminish, as some players falter and others are absorbed by

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larger competitors. This is a familiar pattern seen in other sectors, such as mobile platforms, application servers and Web browsers.

The road to the programmable economy is a long one, and will take decades, just as the Internet and Web each took decades to reach their full potential. In the short to midterm, organizations should prepare for a multiple-blockchain world.

Organizations should assume that, whatever blockchain technology they select and put into production this year, it is likely that, within 18 to 24 months, these will be unplugged in favor of more evolved alternatives.

CIOs and IT leaders should deal with the changing landscape in two ways.

First, understand the current state of the art not only by doing proofs of concept, but also by implementing tactical, narrow-scope deployments that solve specific problems (mostly in the area of creating a shared record of events, assets or transactions within a limited domain) — as opposed to broad-scope, strategic initiatives where consequences of possible systemic failure are severe. The goal is as much in lessons learned as in business value delivered.

Second, while acting tactically, organizations should also think strategically and conceptually, in terms of the longer-term possibilities and business models enabled by next-generation metacoin platforms that will replace current blockchain technology. The aggregate result of these initiatives will be the programmable economy, more than 10 years out.

Gartner Recommended Reading Some documents may not be available as part of your current Gartner subscription.

"Payments Present New Strategic Implications for Commerce"

"Maverick* Research: The Programmable Economy Is the Ultimate Destination for Digital Business"

"Delivering the Digital Banking Experience Primer for 2016"

"Reinventing Payments and Transactions for the Future of Banking Primer for 2016"

"Metacoin Platforms Will Transform Transaction Banking Payments Services"

Evidence

1 The nine initial members were: Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, J.P. Morgan, Royal Bank of Scotland, State Street, and UBS. Additional members: Bank of America, Bank of New York Mellon, Mitsubishi UFJ Financial Group, Citi, Commerzbank, Deutsche Bank, HSBC, Morgan Stanley, National Australia Bank, Royal Bank of Canada, SEB, Societe Generale, and Toronto-Dominion Bank.

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2 "The Fintech 2.0 Paper: Rebooting Financial Services" (PDF).

3 "Honduras to Build Land Title Registry Using Bitcoin Technology," Reuters.

4 "Nasdaq Makes First Share Trade Using Blockchain Technology," The Telegraph.

5 "Everledger Is Using Blockchain to Combat Fraud, Starting With Diamonds," TechCrunch.