Mercator Blog

IBM and Intel ChaseBlockchain Gold, But Demonstrate a Lack of Understanding
Date: March 23, 2015
Tim Sloane
VP, Payments Innovation

The blockchain is undoubtedly the most interesting invention to have come along in years. The short eight-page paper “Bitcoin: A Peer-to-Peer Electronic Cash System” apparently authored by Satoshi Nakamoto is a must read for everyone interested in learning about Bitcoin. This blog assumes the reader is generally familiar with the contents of this paper since it is not overly complex and is the basis of Bitcoin.

The paper offers a mathematical proof that trust can be assured within a distributed open environment without a central authority. All it takes to accomplish this is a sufficient number of equally capable systems competing to solve a difficult calculation. Based on the fact it Bitcoin requires distributed systems competing on a computational problem, both IBM and Intel have decided that this makes them relevant to Bitcoin and the open ledger Bitcoin maintains.

While perhaps it does make IBM and Intel relevant from a systems perspective, how it makes them relevant from a business perspective is a tad murkier. Before evaluating the business opportunities for IBM and Intel, we must first understand what makes Bitcoin a self-sufficient enterprise in a fully distributed environment of independent untrusted entities.

The system envisioned by Satoshi Nakamoto requires competition between multiple systems that are operated independently. Nakamoto recognized that it would take a significant incentive to motivate a sufficiently large number of operators to apply their expensive computing power to solve what is a rather nonsensical (but very well-bounded) computational problem (the nonce). His solution was to give the first operator who solved the computational problem the very same currency the computational effort was protecting—bitcoins. Those who dedicate their systems to solving the problem are called miners and said to be mining bitcoins. If they are the first to solve the problem, they receive a number of bitcoins and also collect fees from transactions entered. The number of bitcoins that miners receive will decrease over time because the supply of bitcoins is finite. It is unclear the Bitcoin economic model will remain stable in the future as miners receive fewer bitcoins and need to fall back on fees, and so IBM or Intel will need to decide if they intend to use this same economic model or develop a new one. Now let’s evaluate what the two companies are up to.

IBM
A Reuters article titled “IBM looking at adopting bitcoin technology for major currencies” states:

“International Business Machines Corp is considering adopting the underlying technology behind bitcoin, known as the "blockchain," to create a digital cash and payment system for major currencies, according to a person familiar with the matter.

The objective is to allow people to transfer cash or make payments instantaneously using this technology without a bank or clearing party involved, saving on transaction costs, the person said. The transactions would be in an open ledger of a specific country's currency such as the dollar or euro, said the source, who declined to be identified because of a lack of authorization to discuss the project in public.”


The article goes on to state that this would be a private implementation:

“The company has been in informal discussions about a blockchain-tied cash system with a number of central banks, including the U.S. Federal Reserve, the source said. If central banks approve the concept, IBM will build the secure and scalable infrastructure for the project.”



Two important aspects are discussed in these two quotes. First, the proposed IBM system will “allow people to transfer cash or make payments instantaneously . . . ,” and second, “. . . IBM will build the secure and scalable infrastructure for the project.”

But here’s the rub. First, a private implementation of the blockchain is an oxymoron. The Bitcoin proof is based on independent systems competing to discover the solution to a problem that is sufficiently bounded so that existing systems can solve the problem in approximately 10 minutes. This approach eliminates the need for the servers to be secure. If IBM intends to “build the secure and scalable infrastructure,” then the blockchain trust model isn’t needed or even beneficial. If the system is owned or operated by a single entity, then that entity becomes the central authority and may as well implement the solution on a traditional database. The second issue about the concept is: “The objective is to allow people to transfer cash or make payments instantaneously. . . .” The ability to operate Bitcoin in an open untrusted environment demands computational proof, which is mathematically shown to require 10 minutes of number crunching. If transactions are instantaneous, then the mathematical proof is insufficient to guarantee trust.

Intel
A PYMNTS article titled “Intel Joins Blockchain Technology Race” offers significantly less information. The author found a job description posted by Intel that indicates Intel is mounting a research effort of some substance:

“….is reportedly looking to build a special team around the blockchain to see where it could harness the power behind bitcoin’s technology. Intel is advertising for a cryptographic researcher position to work on the ledger side of the tech.”



The article goes on to state that:

“The job would be with Intel Labs’ Special Innovation Projects group and would involve investigating “hardware and software capabilities that advance the performance, robustness, and scalability of open, decentralized ledgers.” The post even goes on to explain how the blockchain tech works, including the benefits of using it on digital marketplaces.

‘Its fundamental technical innovation is the decentralized transaction ledger called the ‘block-chain.’ It allows bitcoin to prevent double-spending of currency by recording all transactions in an open ledger without the need for a central authority. Such a distributed, public, secure, peer-to-peer transaction record enables not just the exchange of bitcoins but many secondary uses that the research and startup community are exploring such as digital marketplaces.’ ”



The good news here is that unlike IBM, Intel’s move appears to be motivated by its need to improve hardware and software that advances the performance, robustness, and scalability of the platform, which is after all the business of Intel. That said, one has to wonder why this comes in the form of a Bitcoin initiative, other than the effort to identify the correct nonce uses a specific type of computation. Perhaps Intel would like to be at the top of the heap when it comes to selling mining hardware to Bitcoin miners.

But to do that doesn’t require mathematicians and cryptographers, so perhaps Intel will try to decouple the public ledger from the Bitcoin cryptographic entanglement (where miners mine for bitcoin cryptographic keys and so funding the operation of the public ledger is entangled with the bitcoin currency). Or perhaps Intel can identify a set of well-bounded problems that could replace the nonce. It would be a public good if the meaningless computation that is currently required to establish public trust could be replaced with some meaningful computation that benefited humanity in some fashion.

Today the operation of the public ledger is tightly coupled to the operation of the miners and to the cryptographic keys implemented to sustain bitcoins. Said another way, bitcoins are the cryptographic treasure every miner hopes to win by operating a Bitcoin node. This effort maintains trust in the distributed untrusted environment. Today, the public ledger is sustained by the bitcoin currency and it is not clear how that relationship can be broken without falling back into reliance on a central authority or other trusted entity. Perhaps researchers will find a way to solve this problem soon.