Four stages of blockchain implementation

The blockchain does not yet meet all requirements at once

The following properties are usually desired for blockchain-based systems:

  • Secure and with integrity (data and behavior): Data can only be read and modified by authorized users; the system behaves as specified.
  • Decentralised and distributed: There are no central points that control the system alone or are critical to its operation; the system is resilient to the failure or malfunction of large parts of the network.  
  • Performant and efficiently scalable: The system works with sufficient performance and can grow efficiently without the need for disproportionately more resources, i.e. the effort increases linearly with the performance.
  • Public and permissionless: Anyone can add and operate nodes on the network; additional nodes ideally improve the other three properties, i.e. security, decentralisation and performance.  

To date, there is no blockchain protocol or related distributed ledger technology (DLT) that fulfills all desired properties equally well.

Bitcoin is secure, decentralised and permissionless. However, with less than ten transactions per second, the network lags far behind conventional databases and payment service providers. Bitcoin’s Proof-of-Work (PoW) consensus algorithm also causes the Bitcoin network to consume disproportionately more energy the larger it becomes. So Bitcoin does not scale efficiently.

Other blockchain protocols such as Hyperledger restrict the access of participants. As a result, they achieve safety and high efficiency with lower energy consumption than Bitcoin. However, this is at the expense of decentralisation and openness, because there must be an authority that can include or exclude subscribers in the network.

Many large projects are looking for a comprehensive solution

Numerous projects are currently researching new distributed ledger technologies that have all the desired properties. Ethereum is to be converted from a proof-of-work to a proof-of-stake (PoS) consensus algorithm with the planned Casper upgrade.

Other major projects include IOTA, Cardano and EOS, which pursue different approaches to creating security and efficiency.

So far, no proposed solution has been fully convincing. Although IOTA and EOS promise high performance, they introduce more or less central elements in their systems. Cardano is promising, but still in its infancy.

The crypto-scene is funded with several billion dollars, so that development resources are available. It is therefore only a matter of time until a comprehensive solution has been found. Until then, blockchain projects still have to work with transitional solutions.

Step-by-step approach as an interim solution

Businesses in particular should test blockchain technology and implement their first projects now if possible. No need to wait until a comprehensive technology is available that meets all desired properties equally.

Especially in the industrial environment, a step-by-step approach is recommended in which openness and decentralisation of the systems are first limited and then gradually expanded. There are four stages from a central test system to a completely open system architecture:

Level 0 – A central system simulates the blockchain: In a first step, a central server performs the tasks that are later performed by the blockchain, such as data storage, access control, process logic (Smart Contracts), and so on. The basic system architecture, application prototypes and first use cases can be tested without having to consider the full complexity and novelty of the blockchain.

Level 1 – Permissioned blockchain with a few nodes: A ‘permissioned’ blockchain (e.g. based on Hyperledger) is used for data storage and smart contracts. Initially, only a few nodes are connected and only a limited number of participants decide who can connect to the network and who has which rights. Power over the system is in several hands. In this way, no single administrator has full control over the entire system. This type of configuration is already used in industrial consortia or logistics chains.  

Level 2 – Permissioned blockchain with many nodes: A permissioned blockchain may then grow to the point where the organisation resembles an open rather than a closed system. It is plausible that a blockchain which was developed and tested in stage 1 for a construction consortium will be opened for many or all construction consortia. The critical factors here are which rules are defined for the admission of new participants and how new participants are integrated into the administration and operation of the blockchain. Once a large majority of all potential participants are entrusted with ‘official’ tasks, the governance of the system may look similar to the next stage.  

Level 3 – Permissionless blockchain: A permissionless blockchain replaces all institutional decision and management processes with a protocol that is defined as program code. Only the software guarantees the security of the system. The program code also determines how governance works. While at level 2 new participants must be actively accepted into the system by a central authority and assigned rights, at this level it is sufficient for a new participant to execute the current version of the software or protocol in order to connect to the network.

For the step-by-step procedure to work smoothly, it should be clear from the very beginning of the system design which level of openness should be achieved in the final state. And with each step it should be planned from the start how the transition to the next stage should take place both technically and organisationally.

Author: Collin Müller
Online professional for over 20 years, more than 10 years in the communications and media industry.