Discussions around blockchain technology are proving very popular at the moment, with much of the talk focusing on the disruption and opportunities that this often-misunderstood innovation is going to bring to a broad cross-section of industries. So what exactly is blockchain?

Well, a blockchain can best be described as an open source transactional database driven by cryptographic standards, practices, and policies. Blockchain technology already underpins applications and protocols like bitcoin and Ripple — created as a way to exchange value anonymously and outside traditional value networks.

At the highest level, a blockchain is a searchable ledger (database) where transactions, interactions, and so forth can be validated by a network of computers working to perform complex cryptographic functions. And each part of the network maintains a copy of the database.

For new transactions, a new block is created, added to the chain, and broadcast to other parts of the network. Blockchains are designed to ensure that transactions can be recorded and linked with the additional properties of nonrepudiation and modification detection. In summary, they act as self-forming, trusted-party validators that negate the need for an intermediary such as a government entity or financial institution.

Despite some of the negative perceptions that exist around Bitcoin, the ability to manage the exchange of value without the need for trusted intermediaries has led many observers to speculate there is the potential for blockchain software to have a much wider-ranging impact.

However, there are a number of challenges that must be overcome before blockchain technology can be broadly applied. Most notably, the latency in resolving transactions is too high, and there have been numerous “disruptions” reported, if not full-on hacks.

Performance risk has also been a contentious issue expressed by executives during their discussions with IDC. This relates to concern about the technology’s ability to scale because of the computational requirements associated with proving absolute authenticity of the blockchain database, a process referred to as a “proof of work”.

Changing records in the blockchain (e.g., adding a new block) requires redoing the proof of work and a significant amount of computing resources. Proofs of work are secured via the cryptographic hashes that ensure their authenticity, and to date, these have proven expensive to maintain due to the need for specialised processors that consume considerable amounts of power.

Despite these challenges, there are tremendous implications if a network-based trust mechanism could be established and broadly adopted. The impact will be seen across various industry models.

In the financial services industry, for example, blockchain technology addresses serious issues relating to the delayed settlement of funds inherent in most payment networks, issues that impose costs on users looking to either speed up settlement or mitigate risks as those funds are in transit. With near-real-time settlement, and the ledger itself verifying transactions, blockchains eliminate these costs.

In addition to payments, blockchain technology could help reduce costs, automate trading, settlement, and clearing, and alter how financial firms compete over a range of asset classes. Firms could also establish use cases where secure distributed ledgers can share data and improve transaction monitoring and reporting for compliance purposes, such as know your customer (KYC) and anti-money laundering (AML) programs.

In the government space, blockchain technology and its inherent security benefits open up new opportunities for citizen services, even extending to those transactions that might involve sensitive information.

To this end, Shaikh Hamdan Bin Mohammad Bin Rashid Al Maktoum, Crown Prince of Dubai and Chairman of the Executive Council of Dubai, has launched the Dubai Blockchain strategy to achieve a high degree of efficiency in government departments. The strategy aims to create new specialised sectors and help achieve a position of global leadership, as well as improve efficiency by shifting 100 per cent of government transactions to blockchain networks by 2020.

There are other examples and potential use cases too. In manufacturing, a leading industry for IoT adoption, blockchain technology can help facilitate innovation in all transformation-related programs — connected products (enabling microservices), connected processes (distributed transactions), and connected factories (actuation).

In retail, the costs related to payment transactions remain substantial and a limiting factor when it comes to enabling a broader set of services. However, blockchain represents an opportunity to normalise secure transactions and drive costs down on a per-transaction basis.

In the energy sector, as utilities look to offer additional services that complement their basic power products, the ability to transact in volumes at small amounts would serve as a huge boon to enabling transformation. And in health care, where the potential impact of fraud and abuse is perhaps at its strongest, the use of blockchain would help to mitigate such risks and safely extend connected health capabilities.

The volume of hype around blockchain is about to be turned up to 11, and with some considerable merit; indeed, with awareness around its inherent benefits growing by the day, you can be sure it will be coming to an industry near you very soon.

Organisations need to carefully consider the value of blockchain capabilities as part of their digital enterprise strategies, and explore what the individual and industry-wide implications of such an approach might be.

— The columnist is group vice-president and regional managing director for the Middle East, Africa and Turkey at global ICT market intelligence and advisory firm International Data Corporation (IDC) He can be contacted via Twitter @JyotiIDC