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Will blockchain make the leap from cryptocurrency to smart machines?

Perhaps as recently as the beginning of this year, most people who had heard of blockchains (or the Blockchain — the difference is important but rarely explained) thought of it as something to do with “private” transactions of a sort that needed to be hidden from the eyes of the authorities. A few cognoscenti may have been aware of the underlying libertarian idea of a secure and trustworthy currency that was outside the control of governments and thus of the process whereby “fiat money” can be created or devalued according to political necessity.

Now it’s a mainstream subject on the evening news, with contested reports that the secret identity of Satoshi Nakamoto has been revealed, and reports that the big guns of technology and finance are piling in to the technology and the concept. IBM and Microsoft both have their own blockchain projects, and the former has donated code to the Hyperledger project and made blockchain services available in its Bluemix cloud.

And it’s been widely suggested that blockchains might be an appropriate and useful architecture for the Internet of Things, allowing for a security and decentralized approach that avoids some perceived problems in a conventional client-server architecture. For example, one of the arguments is that the latter can’t scale to manage the enormous number of objects that can and will be connected.

This is despite something of a crisis of confidence in Bitcoin’s own cryptocurrency heartland, where some insiders are arguing that the model and the specific software architecture have been tested and found wanting. Some of the issues they raise inevitably apply to the extension of the Blockchain to IoT; if, as they allege, the Blockchain is itself failing to scale to support its core business, then it’s not going to be much good for IoT either. There are also concerns about the processing power and the associated electrical energy that would be needed to perform the encryption needed for all those objects. The underlying data for a blockchain-based IoT application doesn’t have to be stored on a centralized server architecture paid for by the enterprise, but it still has to be stored — and the need to maintain multiple copies surely increases rather than obviates the storage requirement.

This might not matter for some IoT deployments of distributed ledgers, of which the Blockchain is now the most famous; the performance required to track a very large number of financial transactions is much more than would be needed in some other contexts such as real property transfers or the management of autonomous agricultural machinery.

Nevertheless, we think that there are serious problems with the implicit business model that underlies all these proposals.

To think this through, let’s imagine a smart connected washing machine that’s autonomous and able to enter into its own smart contracts. We are not aware of anyone proposing exactly this use case, but the idea of autonomous objects being able to buy and sell data in exchange for other services has been proposed. So our washing machine orders detergent refills as it needs them, or perhaps when it becomes “aware” that a good price is available (one presumes that it knows how much storage space is available, or this could become ugly very quickly).

Truly smart washing machines don’t care about brand, so they are not distracted by advertising. But it can know about price and performance at levels of detail that would make its owners glaze over. So it could make the trade-offs that its owners would make if they had the time and bandwidth available. It can look for new sources of information and it pays for this with the money it makes from selling its own performance data. It can get new washing programs from independent third-party sources, can schedule its cycles to take advantage of electricity prices, and maintains itself by ordering service visits from an Uber-like network of independent maintenance engineers, which it rates and recommends to its washing-machine peers.

Blockchain proponents, like the cool and clever startup Filament, suggest this sort of capability for bigger, more expensive machines such as tractors, industry-grade drones and even connected cars. One can imagine a connected car sourcing its own best deal for services rather than being tied in to the automotive OEM’s dealer and repair shop network; given the advent of more open marketplaces for parts and services like Openbay, they might be pushing at an open door.

Nevertheless, it bears saying that this use case runs up directly against one of the main drivers behind manufacturers’ intention to add IoT capability to their products — what is inelegantly called “servitization.” Manufacturers don’t want to sell boxes, they want to sell services and long-term subscription relationships with continuing revenue streams. They don’t want to make products that will break up with them as soon as they leave the factory in order to provide a better, smarter service to their new owners. The same motivations also apply to automotive OEMs, who are adding connectivity to their vehicles in part to deepen their not-very-strong relationships with the end customers, and thus to increase their share of the after-sales parts and services market. Why should they want to enable cars to shop around for this?

Car and other manufacturers all want to increase their engagement with customers and to use connected services to weaken their competition — not to build flat marketplaces in which their products and their data are available to everyone. It’s hard to avoid the conclusion that the use of decentralized architectures like the Blockchain to manage connected objects are technically possible and hold great potential, but that this can’t be realized without a big shift in business and economic models.

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