Past the hype: getting practical with blockchain
Boston Fed white paper examines the nuts, bolts, and promise of a new technology
Blockchain technology, hailed as “the new Internet” by some, hasn’t lacked for hype. In fact, the famous Gartner Hype Cycle, which tracks new technologies as they move toward broad adoption, has placed blockchain in its “peak of inflated expectations” phase since 2016. But things may be about to change.
Blockchain sits today on the edge of the cycle’s “trough of disillusionment” phase, when interest wanes, implementations fail, and investment continues only if products improve enough to satisfy early adopters. Is this really where blockchain is headed?
Technologists at the Federal Reserve Bank of Boston wanted a better handle on blockchain’s future. They never bought into the hype, but they’ve been intrigued by its potential for years, said Paul Brassil, vice president of IT at the Boston Fed. It’s why Brassil and Senior Vice President Jim Cunha led the development of a white paper, “Beyond Theory, Getting Practical With Blockchain,” which was released Wednesday.
The paper aims to move past theory and speculation on blockchain and get immersed in the technology. It details the fits, starts, and progress as a Boston Fed team worked through two use cases. In its conclusion, the paper doesn’t embrace the hype, but the authors aren’t disillusioned about blockchain, either. In fact, they see promise.
“It’s not a done deal that blockchain will be transformative, but the message here is that this technology is important,” Cunha said. “There’s enough going on with it in every area of financial services that I think something is going to come out of it. And we need to understand it.”
A question of trust
Brassil said the most important word associated with blockchain is “trust.” Blockchain was first conceived by an anonymous person or team of developers after the Great Recession, when trust in financial systems was plummeting. The platform aims to restore trust by removing the third-party middlemen in transactions—like banks and brokers—that the inventors felt had let people down.
The model creates trust by relying on transparency and consensus. In blockchain, also known as “distributed ledger technology,” data about a particular transaction is broken into blocks, chained together via a unique digital signature, and distributed across a vast network of computers. There’s no single point of access or failure, and any new transaction data on the chain must be approved by everyone in the network. To corrupt the transaction, a bad actor would have to compromise every entity on the network, a near impossibility.
The first “application” to prove the promise of blockchain was the Bitcoin network, which has been running continuously on the Bitcoin blockchain since 2009. The success of blockchain-based cryptocurrencies like Bitcoin showed Brassil and Cunha that the technology had potentially major implications for the financial industry, and they knew they needed to start investigating. The Boston Fed began participating in blockchain platform developer events, discussing and sharing information with other central banks and the financial services industry, and experimenting with proofs of concept. By really digging into the technology, they said, the Boston Fed is signaling that it’s time for the financial services industry to research the technology, as well.
“We needed to get ahead of this, we needed to get our hands dirty with this,” Brassil said. “We’ve opened up the hood, and we’ve learned about opportunities and risks, hype versus reality.”
Two use cases
The white paper revolves around two use cases. The idea was to learn from them, not put them into production.
- The first use case focused on developing a general ledger platform to simulate the banking transactions and settlements of a critical Boston Fed accounting system. The goals for the use case were to learn about blockchain, test design features critical to central bank services, and validate a lean development effort with minimal investment. The first use case was initially constructed on the Ethereum platform, which was appealing because it’s managed through a community of open source developers, and it features expanded capabilities with smart contracts, which enable credible transactions without third parties. The first use case eventually migrated from Ethereum to the Hyperledger Fabric platform, due to Hyperledger’s permissioned network architecture, native membership services, and public key infrastructure capabilities.
- The second use case focused on what an “audit” node or “supervisor” node would look like in a future banking blockchain network. This use case was built on the Hyperledger Fabric platform from the start, due to the same enterprise identity and access management capabilities identified in the first use case.
Cunha said the paper intentionally chronicles the entire journey Boston Fed developers took working with evolving platforms and a fast-changing technology. By not skipping the “messy” parts, like setup (not easy), or an inexperienced developer community (the Boston Fed team was forced to turn instead to YouTube at one point), the Boston Fed aimed to present a fuller picture about where blockchain is and where it’s headed.
In the end, Cunha and Brassil said they hope the Boston Fed’s contribution to the blockchain conversation will spark more experimentation, sharing, and learning.
“This shows the Fed is committed to innovative technology research,” Brassil said. “We are committed to understanding it, and to bringing understanding to the public.”